Why Erdogan Won’t Ask the IMF for Help

Turkey’s economy is a dam waiting to break. The lira has lost 90 percent of its value against the dollar over the last three years, while Ankara, as of last month, depleted its net international reserves (excluding swap lines) in an ineffective defense of the currency. Turkey’s overleveraged nonfinancial companies, already drowning in foreign exchange liabilities totaling some $300 billion, continue to pay the price. Yet Turkish President Recep Tayyip Erdogan is still unlikely to sign a bailout deal with the International Monetary Fund (IMF), despite the country’s need for it.

That’s because Erdogan prefers quick fixes. One example of this is his recent expansion of the lira-riyal swap line with Qatar—a temporary arrangement that boosts Turkey’s Central Bank reserves on paper—from $5 billion to $15 billion rather than negotiating what Turkey’s ailing economy desperately needs: a Stand-By Arrangement or an Extended Fund Facility with the IMF, which would provide the country with a medium-term low-interest loan in exchange for committing to structural reforms.

The obstacle for Turkey’s strongman president isn’t ideology; it’s IMF conditionality and its potential to undermine his hypercentralized style of governance.

Many pundits in Turkey and abroad argue the main impediment to an IMF program is Erdogan’s ideology coupled with his fear of voter backlash to such a program. They’re wrong. Rather, the obstacle for Turkey’s strongman president is IMF conditionality and its potential to undermine his hypercentralized style of governance.

Within the last decade, Erdogan consolidated power with a political platform built on unorthodox economic policies. Investors used to view the president’s bizarre beliefs—interest rates leading to higher inflation or an “interest-rate lobby” led by Jews aiming to tank Turkey’s economy—as embarrassing and annoying. Those days are long gone. After the Central Bank lost its last semblance of independence in 2019, those beliefs have become mainstream. To a large extent, they now dictate Turkey’s monetary policy, which has led to an exodus from the country’s bond and equity markets.

To make matters worse, the pointless defense of the Turkish currency’s exchange rate, first at 6 and then 7 liras to the dollar, have proved catastrophic to Central Bank reserves. Erdogan is particularly vulnerable here because those efforts were mounted by his underqualified son-in-law, Finance and Treasury Minister Berat Albayrak, who should never have held the position in the first place.

It is true that Erdogan has proved himself to be pragmatic before, particularly in the face of crisis. Interest rate hikes have occurred, even when he initially opposed them. After the escalation of the crisis with Russia, he swallowed his pride and reset ties. But these decisions did not entail a devolution of power. In fact, given his near-total control over the media, Erdogan can make U-turns far more easily than in a true democracy, as long as they do not require him to reverse his 18 years of power consolidation.

The real reason Erdogan cannot go to the IMF is that any Stand-By Arrangement or Extended Fund Facility requires structural reform and, therefore, power-sharing and good governance measures. The rule of Erdogan’s Justice and Development Party (AKP) has benefited from a lack of transparency and accountability.

Turkey’s sovereign wealth fund, which acts as the Turkish president’s parallel budget, is not audited by parliament or the Court of Final Accounts. One private auditor even said there is not enough data to conduct a proper assessment. Economic data provided by the Turkish Statistical Institute is also suspect. A 2017 report by Germany’s second-largest lender, Commerzbank, on Turkey’s dubious growth figures was titled, “Turkey – Are you kidding me?”

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Erdogan’s economy thrives on off-balance-sheet arrangements for friends of the AKP. One example: the Zafer Airport inaugurated in 2012 in western Turkey’s Kutahya province and run by a construction magnate close to Erdogan who has helped him acquire government media outlets. The government forecasted 7.6 million passengers during the first seven years of the airport’s operation; the airport has had just 300,000 passengers so far. Under a government-guaranteed revenue deal expiring in 2044, the company is estimated to receive 205 million euros ($228 million) from the public purse for serving nonexistent flights at an airport it built for over $55 million.

An IMF program, with its accompanying reforms, would likely eliminate such outrageous revenue guarantees and countless other off-balance-sheet arrangements. It would also demand competent technocrats, transparency, accountability, independent regulatory agencies, and a Central Bank free from political pressure. But with such reforms, Erdogan would effectively be asked to forfeit control over all the shady deals he and his cronies have brokered over time. In other words, an IMF deal is a direct threat to his rule and accompanying patronage network.

Turkey’s previous IMF program, which started in 1999 and came to head in the 2001 crisis, brought greater transparency and accountability to the country. That package came in response to unsustainable levels of government debt and Turkish banks’ exposure to it. The IMF called for structural reforms to strengthen public finances and fiscal transparency, and new management as a requirement for lending. It worked. Turkey stabilized, attaining an average of 7 percent growth for the next six years.

And while an IMF program could yield similar benefits for Turkey today, Erdogan is loath to submit to its conditions. The last time around, the IMF’s painful austerity measures did deliver results, but not before Devlet Bahceli, the ultranationalist partner of Turkey’s three-way coalition, forced early elections in 2002, ousting all political parties represented in parliament, ruling and opposition alike, and vaulting Erdogan, the former mayor of Istanbul, to leadership. The same Bahceli, as unpredictable now as he was back then, is Erdogan’s key coalition partner today.

Erdogan, who was the beneficiary of Bahceli’s fickleness in 2002, would hate to become his latest victim ahead of the upcoming 2023 presidential elections, especially since the current Istanbul mayor, Ekrem Imamoglu—an increasingly popular figure who succeeded in uniting Turkey’s fractured opposition—has emerged to be his biggest rival. Yet elections are in three years—a lifetime in Turkish politics—and Erdogan needs to keep the spoils flowing not only to the AKP’s patronage network but also to Bahceli and his clients today.

It is for these reasons that the IMF will be the Turkish government’s absolute last stop. If Turkey’s economic woes and its suffering citizens somehow force Erdogan to the table, the IMF should not give him a free pass. The IMF must demand fiscal transparency, an end to off-balance-sheet arrangements, hiring of able technocrats instead of family members, and the imposition of stringent anti-corruption and anti-money-laundering measures. Turkey’s large, young, and dynamic population can be a driver of economic growth for both Europe and the Middle East. They deserve to be given that chance.