Economic and political developments in Turkey have had investors worried for more than a year now.
One of the country’s most immediate needs if it wants to get its house in order is to ensure total independence of its central bank, according to the man who led the bailouts of Greece, Portugal, Iceland and Ukraine during the Great Recession.
“Turkey faces a number of challenges, and one of them is that the central bank needs to be fully independent so it can continuously assess and tighten policies as circumstances change in a forward-looking manner,” Poul Thomsen, director of the International Monetary Fund’s Europe department, told CNBC’s Joumanna Bercetche during the IMF Spring Meetings in Washington, D.C. over the weekend.
“So we welcome the increase we’ve seen in interest rates in the last six to seven months, but it’s important that the Turkish central bank be allowed to be fully independent in its assessment of monetary policy in addition to a number of other challenges on fiscal policy, and more transparency.”
Turkey’s economy is already in recession, rocked last year after fears over government interference into central bank independence, over-leveraged banks, a large current account deficit and a diplomatic spat with the U.S. triggered investor and capital flight. The lira lost 36 percent of its value against the dollar by the end of 2018.
Turkish President Recep Tayyip Erdogan has espoused keeping interest rates down despite rising inflation, currently at more than 19 percent. Investors fear he will continue to pursue populist monetary policy after his party suffered unprecedented defeat in local elections last month, the results of which he is still contesting.
Inflation and unemployment are in the double-digits, with the latter expected to rise as a result of slower economic growth. Moody’s expects the Turkish economy to contract by 2% in 2019.
Thomsen denied any talk of a potential IMF program with Turkey. “There is no discussion on a program between Turkey and the IMF, none,” he said, in response to a now frequent speculation of investors and analysts. “We have normal regular contact in the context of our surveillance.”
Financial market jitters are only building as a standoff with the U.S. over weapons system purchases builds. Efforts by the Turkish central bank cutting deep into its reserves to prop up the lira aren’t helping, with the currency this week listed as the worst performing among emerging markets.