Turkey: How Mehmet Simsek convinced Erdogan to drop his low interest rate policy

When Mehmet Simsek met Turkish President Recep Tayyip Erdogan last month, he didn’t come armed with words alone to defend his case.

During the meeting, which lasted for two and a half hours, the economist and former finance minister laid out all the data he had on the Turkish economy.

Moving from one point to another, Simsek gave the president an exhaustive picture of the state of the nation. 

The presentation made Erdogan feel uncomfortable, three sources familiar with the meeting told Middle East Eye. They said the president insisted Simsek’s words alone were enough.

“You have to see all the data and understand what is going on yourself,” Simsek retorted, continuing his presentation.

This was one of many meetings they had between April and the Turkish elections on 14 May, where Erdogan attempted to convince Simsek to become his new finance and treasury minister.

But Simsek wasn’t budging. The veteran of earlier AKP governments, who served as deputy prime minister for economic and financial affairs from 2015 to 2018, demanded a broad overhaul in the Turkish economic structure, one that would directly contradict Erdogan’s core unorthodox monetary policy.

Erdogan’s obsession with low interest rates and an economic policy that depends on credit growth, wage increases, tax forgiveness and free gas partly handed him another term during last month’s elections, despite runaway inflation.

Yet it remains problematic. The government used backdoor methods to stabilise the lira ahead of the polls, and burned through all the central bank’s reserves.

Since 2021, Erdogan has also propped up his economic programme through a series of currency swap or deposit deals with regional neighbours such as Qatar, the UAE, Russia and Azerbaijan.

But even after a recent $5bn deposit by an unknown foreign country, the central bank’s reserves, which include domestic borrowing from local banks, now stand at minus $5bn, a historic low as of 2 June. Experts are fearful of a balance of payments crisis if Ankara continues to follow the same route.

Standing their ground

Erdogan and his allies have been defending their policy for months, insisting that it will produce growth and employment and shrink the trade deficit. Its defenders note unemployment dropped to 10 percent from 12 percent last year, and gross domestic product posted 5 percent growth in 2022.

However, inflation is still near 40 percent as of May and the trade deficit hit $57.8bn in the first five months of 2023, jumping nearly 30 percent year on year. Meanwhile, Turkish exporters say they have lost their competitive edge, with many already seeking alternative bases of production in places like Egypt, where employment costs are much lower.

Simsek, during the meeting last month, said over and over that Erdogan’s foreign-funded monetary policy was unsustainable. “You cannot work this mill by carrying water,” Simsek said, using an idiom that implies the economy cannot be managed using a little help from outsiders. 

Nonetheless, Erdogan tried to stand his ground on interest rates, which he believes are un-Islamic, something that goes against the core message of the Quran. Simsek then tried to convince the president that there was no ignoring the world we live in.

A spokesperson for Simsek declined to comment. The Turkish presidency also has a longstanding policy of not commenting on Erdogan’s personal exchanges.

“There was an avalanche of phone calls from current and former ministers, MPs and everyone you could think of to Simsek to accept Erdogan’s offer and come in as the economy minister,” one source familiar with Simsek’s negotiations with the president told Middle East Eye. “They were telling him that he has to save the Turkish economy.”

The source said in the end Simsek had to accept the offer: you can only say no to Erdogan so many times.

But Simsek wasn’t alone in trying to convince Erdogan that his monetary policy wouldn’t land the benefits he seeks. 

A second source said Erdogan’s son-in-law Selcuk Bayraktar and his older brother Haluk, who jointly run the renowned drone-making firm Baykar, also tried to persuade the president that he was wrong on low interest rates and he needed Simsek. “They clearly succeeded,” the source added.

Haluk Bayraktar, in particular, was outspoken on Twitter following Simsek's appointment, loudly and clearly congratulating him and his new choice of central bank governor, Hafize Gaye Erkan.

“It might not be really surprising for Haluk Bayraktar, whose Baykar continuously deals with exports and imports to maintain production, to speak with Erdogan on the state of the economy as an exporter,” a third source told MEE, noting that he is the head of the Saha Istanbul association, which represents 960 defence firms and industrialists.

A spokesperson for Baykar declined to comment.

A rival in the team

Sources told MEE earlier this month that Simsek proposed to Erdogan an 18-month time frame where he would gradually increase benchmark interest rates from 8.5 percent to as high as 25 percent.

A separate source familiar with Erdogan’s conversations with Simsek said the president agreed to give him whatever he required to fix the economy. “Simsek told him that he would work with people that the government blacklisted in recent years,” the source said. “And Erdogan said it wouldn’t be a problem.”

There are concerns among international investors and local economists that Erdogan could fire Simsek in the near future if an aggressive interest rate hike slows growth and costs jobs ahead of next year’s municipal elections. Erdogan is determined to recapture Istanbul, Ankara and Antalya from the opposition.

'Simsek sees that Erdogan isn’t letting go of control and it might agitate him in the long run'

- Source familiar with talks

That’s why everyone was quite worried when Erdogan decided to move controversial central bank governor Sahap Kavcioglu to the Banking Regulation and Supervision Agency (BRSA), a key institution that deals with credit flow.

The source said Simsek presented three recommendations for the BRSA role to Erdogan, who then picked Kavcioglu but insisted he would do whatever Simsek requires.

Erdogan is known for appointing rivals into key positions to use them as checks on each other.

“Simsek sees that Erdogan isn’t letting go of control and it might agitate him in the long run,” the source added.

People close to Simsek also told MEE that soon after taking office, the new finance minister told his circle that the economic situation was worse than he had imagined.

Yet another person close to Simsek said no one should focus on small details when the new finance minister has “crossed an ocean” by convincing Erdogan to follow his lead on interest rates and the choice of a new central bank governor. 

“Kavcioglu the next day visited Simsek and offered his full support,” the person said. “After all, Kavcioglu has a 30-year banking career.”