Erdoğan will also have to urgently look for ways to overcome the negative effect of the protracted financial and economic crisis. At the end of May, the Central Bank of Turkey reported negative net foreign exchange reserves for the first time since 2002
. Previously, Erdoğan had managed to finance his unorthodox monetary policy to keep interest rates low amid runaway inflation with currency swaps and billions of dollars in injections from friendly Gulf states and Russia, but these resources were not enough. Covering the colossal and permanently growing budget deficit is becoming increasingly difficult. Before the elections, the authorities resorted to various schemes involving state-owned banks to stabilise the Turkish lira exchange rate, while making life difficult for Turkish exporters. After the elections, the lira went down sharply, reaching record levels of over 30 lira per euro and 27 lira per US dollar by mid-summer
. The fall of the lira further aggravated the main problem of the Turkish economy – the unstoppable growth of the budget deficit, increasing the “price” of the massive government “guaranteed deposits” programme, under which the Treasury and the Central Bank, since the end of 2021, have compensated depositors for currency depreciation in addition to bank interest on deposits.
The original budget for 2023 called for expenditures of 4.5 trillion liras ($172 billion) and a deficit of 661 billion liras ($25.3 billion). But the government’s pre-election spending programmes and the costs of eliminating the consequences of the February earthquake led to the collapse of the budget. According to official data, the budget deficit for the first five months of 2023 exceeded 263 billion lira ($10 billion),
more than 40% of the full year forecast. By the end of 2023, the budget deficit is projected to reach 10% of GDP.
Under these conditions, the authorities were forced to adopt an additional budget that provides for additional spending of 1.1 trillion lira ($42 billion)
, of which 44% should go to related programmes with the earthquake. While the requested amount is not enough to meet needs, the government cannot afford to ask for more due to the legal obligation to increase revenues equally. Instead, the Grand National Assembly of Turkey (TGNA) at the initiative of the AKP passed another bill that would allow Erdoğan to allocate funds to state organisations and expand borrowing limits. This is because, according to Turkish law, the additional budget requires the government to determine equivalent revenues and adhere to the planned budget deficit. Unable to generate much revenue and despite post-election tax hikes, the government settled for an additional 1.1 trillion lira ($42 billion) budget proposal, hoping to bridge the gap with other means. Accordingly, a new bill to allocate funds to state organisations and raise borrowing limits has enabled Erdoğan to cover the missing appropriations of 700-800 billion liras ($30 billion) through loans. According to the opposition, such a bill infringes on the powers of the TGNA to form the budget and actually violates the constitution.
Another scourge of the Turkish economy, which depends on imports, is the rise in foreign exchange prices, which is one of the main factors driving inflation. As export and tourism revenues do not cover imports, the country’s current account deficit widened by 8 billion in May 2023, bringing its annual growth rate to $60 billion. To cover this gap, Turkey needs to attract foreign funds. However, despite the appointment of the well-known economist Mehmet Şimşek as the new Minister of Finance and Hafize Gaye Erkan, a financier with extensive experience in leading international structures, as the head of the Central Bank, the Turkish authorities have still not been able to inspire confidence in Western investors and still count on the financial support of the wealthy Gulf monarchies. This, in particular, is evidenced by the international activity of the Minister of Finance and Erdoğan's post-election tour of the Middle East in July this year.
The government is looking to attract $25 billion in investment from Arabian oil-producing monarchies through a variety of schemes, including their participation in new privatisations.
The domestic political landscape of Turkey will obviously be significantly determined by the president’s attempt to regain massive support for the AKP, which has been losing voters’ loyalty both in relative and absolute terms for three parliamentary electoral cycles. In November 2015, the AKP was supported by 23.6 million people, in 2018 21.3 million supported it, and in 2023 only 19.3 million. At the same time, more than 11.24 million members (11 million 241 thousand), i.e. approximately 20% of those eligible to vote in Turkey are members of Erdoğan’s party. The presented statistics in themselves reflect an amazing phenomenon. The rival Republican People’s Party (CHP) has a little more than a tenth of this figure – only 1.37 million (1 million 369 thousand), the Good Party has 618,000, and the Nationalist Movement Party (MHP) has 464,000.
Erdoğan and his supporters will have to seriously prepare for the municipal elections in the spring of 2024, in which the AKP plans to regain control of the largest cities – the capitals Ankara and Istanbul, as well as Antalya. The municipal elections scheduled for March 2024 will be another major electoral test for Erdoğan. The president considers them “decisive” and regards them as a kind of vote of confidence. Acting in this logic, he urged his supporters to actively work on the return of large cities, positions which were lost by the AKP in the 2019 municipal elections. Their results were a serious disappointment for Erdoğan, who had won the 2018 presidential election six months earlier with 52% of the vote.
For all the complexity of the task, Erdoğan may gain some advantages if the opposition cannot re-consolidate after the collapse of the “coalition of six parties” and maintain the support of Kurdish voters in urban centres. In addition, a court ruling against Istanbul Mayor Ekrem İmamoğlu, a key figure in the opposition CHP, could see him “eradicated” from politics for several years.
The composition of the new government and its first steps also allow us to make a number of assumptions about the further development of events within the framework of Erdoğan’s new term. The new government has many capable technocrats (mostly non-partisans, of the 18 cabinet members, only five are members of the AKP). This line-up aroused cautious optimism among outside observers about the possible return of the Turkish government to the course of progressive reforms of the 2000s.
Speaking to reporters after a 4-hour meeting with the new government on June 6, 2023, Erdoğan said that the two pillars of his rule would be “stability and security.” “God willing, we will stand shoulder to shoulder and build a new Turkish century together,” the president said
. He also promised to bring inflation down to single digits and make Turkey one of the 10 largest economies in the world. At the same time, however, Erdoğan also signalled that subsidies to farmers and pensioners would continue, which in turn raised questions about how successful or independent the new finance minister and head of the treasury, Mehmet Şimşek, will be. Şimşek was dismissed in 2018 from the post of Deputy Prime Minister for Economics for resisting Erdoğan’s intervention in the economy – primarily his demands for low interest rates. In one of his first statements after his appointment, Şimşek noted that “Turkey has no other choice but to return to a rational economy
In turn, the new Foreign Minister Hakan Fidan, who previously headed the Turkish National Intelligence Agency, promised to develop a “national foreign policy vision.” What this means in practice remains to be seen. In diplomatic circles, Fidan is considered an intellectual, more thoughtful and insightful than his predecessor Mevlüt Çavuşoğlu, which will inevitably affect both the style and the substantive study of foreign policy.
To understand Erdoğan’s new course, it is important not only who took key positions in the government, but also who lost ministerial portfolios. Thus, Suleiman Soylu lost his position as head of the Ministry of Internal Affairs, and who actually became a public politician, willingly distributing interviews with threats against the United States. Clearly, through these reshuffles, Erdoğan was trying to send a signal to the West that Turkey was “normalizing” to a certain extent and that the government would pursue a more moderate and constructive policy.