Having long lost its independence, mainstream Turkish media appeared too afraid to report on the resignation for 24 hours, until the presidency finally issued a statement saying Albayrak’s decision to step down had been accepted. In the absence of an official explanation, Turks took to their favorite WhatsApp groups, where the popular explanation was that Albayrak had resigned in protest of the replacement of central bank governor last week without his knowledge. Who knows — and does it even matter?
Albayrak, the prodigal son-in-law, had been Erdogan’s heir apparent. He was placed in charge of the Turkish economy in 2018, at a tender age of 40. During his tenure, he oversaw a rapid decline in what was once one of the fastest-growing emerging markets in the world. Today, unemployment is high, inflation is in double-digits and the Turkish lira has been in free fall, having declined 30 percent against the dollar this year alone. No one wants to invest in Turkey, and portfolio outflows alone show money fleeing. Worse, in an effort to prevent further depreciation of the Turkish lira, over the past year, Turkey’s central bank is estimated to have sold over $100 billion from its coffers via state banks, sending net reserves to a sharply negative territory.
This is tantamount to selling family silver to buy ribbons and ornaments for a birthday party. As a result, Turkish economy is on the brink of a precipice.
But make no mistake, while Erdogan’s son-in-law may ultimately emerge as the scapegoat of Turkey’s economic decline, in reality he was only enacting the Turkish leader’s vision — in this case, accommodating a strongman’s obsession with low interest rates. Erdogan has long seen interest as “the mother of all evil,” theorizing that “interest rates are the cause of high inflation,” upending a standard economic theory. What President Trump has tried to do over Twitter on Federal Reserve decisions, Erdogan has done through legislation and coercion, step by step diminishing central bank’s independence and replacing its governors.
The political story here has a lesson for all. On a larger frame, Turkey is paying the price for turning a relatively competitive and transparent economy into a personalized affair micromanaged by one man with extreme discretion. In 2017, Erdogan succeeded in overhauling the country’s system of governance from a parliamentary democracy to a consolidated presidential system. He has argued that Turkey should be run “like a corporation” and that bureaucracy and the judiciary — all things that make up a system of checks and balances — were “shackles” that prevented progress. One by one, the independence of the nation’s economic institutions, from central bank to autonomous institutions such as the competition or capital markets boards, were dismantled, all stacked with Erdogan loyalists. By the time the president appointed his son-in-law as the economy tsar in 2018, with a consolidated portfolio that combined ministries of finance and the treasury, the transformation had been complete.
When such a huge and sophisticated economy is run like a family business, people get nervous. Since 2018, Turkish citizens have been keeping the bulk of their savings in foreign currency, and other than big government tenders, there is little appetite for investment. Foreign funds and direct investment are no longer pouring into the country and the private sector remains highly-debted — and on edge.
Any normal government faced with this kind of picture would consider a stand-by program from the International Monetary Fund, but Erdogan would rather tell his base that he is fighting a “war of independence” against foreign enemies than seek a true remedy.
All of this makes the recent resignation more of a palace intrigue than a real shift in economic policies. Turkish external debt stands at $420 billion and the state coffers are nearly empty. Cronyism is rampant and the investment climate is risky. What Ankara really needs is a hefty cash injection and a return to a rules-based order with independent institutions, but this is anathema to Erdogan’s vision. He would rather keep control of the economy and remain the ultimate decision-maker on all things financial — meaning the recent resignation of his son-in-law is more a game of musical chairs than an actual ray of hope for the economy.