Turkey looks to Europe and US to help stabilise its wounded economy

With the prospect of a deep recession looming, Turkey’s President Erdogan is under significant pressure to resuscitate his country’s economy. But accepting external assistance is not always straightforward, explains Dan Arbell. 

Since early March, when the first case of COVID-19 was confirmed in Turkey, the country has been struggling in the face of the pandemic’s outbreak, as a total of 163,100 cases have been confirmed, resulting in 4,515 deaths to date. It took President Recep Tayyip Erdogan several days to begin imposing strict measures of social distancing, closures and curfews, short of a national lockdown, but nearly three months later, data shows that there is a decline in the number of fatalities, confirmed cases, and patients in intensive care units. On 1 June, restrictions on intercity travel will be lifted, restaurants, cafes, parks and sports facilities will be reopened, as well as museums, beaches and Istanbul’s Grand Bazaar. The president and ministers in his government have made clear that the new measures reflect the understanding that the country is on its way to returning to the pre-March normal order, but it is not there yet. Nevertheless, Turkish officials are certainly encouraged by the downward trend in the disease. Erdogan went as far as saying that his government had dealt with COVID-19 better than any other government in the world.

Since early March, when the first case of COVID-19 was confirmed in Turkey, the country has been struggling in the face of the pandemic’s outbreak, as a total of 163,100 cases have been confirmed, resulting in 4,515 deaths to date. It took President Recep Tayyip Erdogan several days to begin imposing strict measures of social distancing, closures and curfews, short of a national lockdown, but nearly three months later, data shows that there is a decline in the number of fatalities, confirmed cases, and patients in intensive care units.

On 1 June, restrictions on intercity travel will be lifted, restaurants, cafes, parks and sports facilities will be reopened, as well as museums, beaches and Istanbul’s Grand Bazaar. The president and ministers in his government have made clear that the new measures reflect the understanding that the country is on its way to returning to the pre-March normal order, but it is not there yet. Nevertheless, Turkish officials are certainly encouraged by the downward trend in the disease. Erdogan went as far as saying that his government had dealt with COVID-19 better than any other government in the world.

National economic indicators raise concerns

Beyond the health challenge that the country is still facing, the area which has been most severely impacted by the outbreak is Turkey’s economy, which was in a vulnerable position before the pandemic hit, with a weakening currency (13% gain of the US dollar against the Turkish lira in early 2020), high debt, dwindling foreign currency reserves and growing unemployment (13.4% in January 2020).

Since March, non-essential businesses have been closed and the large tourism sector has come to a halt. The government allocated tens of billions of liras for funding to businesses, unemployment support and the postponement of mortgage payments. The three issues that raise the most concerns in the Turkish leadership are the fall of the lira against the US dollar, the rising rate of unemployment and the drop in foreign currency reserves. On 6 May, the lira dropped to its lowest recorded level against the dollar (at 7.2690 lira), the estimated rate of unemployment is at 17.2% and gross foreign currency reserves fell to their lowest point since 2009 (US$77.4 billion according to the IMF) due to the central bank’s policy of selling approximately US$44bn to prop up the lira. 

Analysts are already predicting a full year of recession ahead, including a collapse of the tourism sector, which will fuel pressure on the deficit and the lira. Facing these tough challenges, Erdogan has rejected outright experts’ recommendations to accept the support of the IMF. While the not-so-fond memories of IMF’s 1998 intervention in the Turkish economy are still fresh, the president’s critics are noting that his refusal to accept IMF assistance stems from political and not economic reasons, as IMF support is not consistent with the image Erdogan is trying to project of Turkey as a global power and will also demonstrate domestically his own mismanagement of the economy.

In this context, it seems that Erdogan is placing most of his hopes on establishing swap/credit lines with foreign central banks, mainly the US Federal Reserve and European banks, to resuscitate the Turkish economy. At present however, the US and European financial institutions are showing no signs of flexibility and insisting that Turkey meet their strict criteria if it wishes to establish swap lines.

As Turkish options seemed to be running out, its ally Qatar has come to the rescue by announcing on 20 May a tripling of its currency swap agreement with Turkey from US$5bn to US$15bn, providing much-needed foreign funding to reinforce Turkey’s depleted reserves. Nevertheless, Turkey is continuing its charm offensive vis-à-vis the US and Europe in the hope that it can secure more funding in the coming weeks, ahead of a second wave of COVID-19 that may come in the autumn.

Relations with the EU

Erdogan’s state of mind on this subject is best reflected in the message he issued on 9 May, on the occasion of Europe Day. In his message, conciliatory in tone, Erdogan hailed the European Union for its achievements over the years, expressed sympathy for the challenges it faces as a result of COVID-19 and highlighted Turkish assistance to some EU member states during the pandemic.

The Turkish president further stated that while the EU had displayed a ‘discriminatory and exclusionary stance toward Turkey on various issues’, it is understood that ‘Europe and Turkey are in the same boat’. For this reason, Erdogan believes, the time has come to join forces and revitalise the European–Turkish relationship, emphasising that his country is determined to become a full member of the EU in the future. Erdogan’s message was reiterated just days later by Foreign Minister Mevlut Cavusoglu, who called for ties with the EU to be re-energised, singling out the issues of visa liberalisation, upgrading the customs union and improving the March 2016 migrant deal. 

Such words by senior Turkish officials have not been heard in a long time and are in sharp contrast to the situation prior to the outbreak of COVID-19. In the last year, the already strained relationship between the EU and Turkey (due to tensions over the erosion of Turkish democratic institutions in the aftermath of the failed July 2016 military coup), further deteriorated. Differences between the two sides over the Turkish invasion of Syria in the autumn of 2019, Turkey’s involvement in Libya and its natural gas dispute with Cyprus, were reinforced by the Syrian refugee crisis, culminating in Erdogan’s decision in late February to open Turkey’s border with Greece, delivering on his previous threats to ‘open the gates’ and allow Syrian refugees to enter the EU.

Ankara’s change in tone leads to the conclusion that the Turkish government is desperately seeking European financial assistance. EU officials have expressed appreciation for Turkey’s solidarity and cooperation in the face of COVID-19, and noted that the EU is considering a support package for Europe’s ‘immediate neighbours’, but has not made a final decision on it. Also, while reiterating their intention to continue accession talks with Turkey, EU officials are making it clear that Turkey still needs to meet a certain number of financial and political criteria, that the EU has been insisting on for some time.   

Relations with the US

The US Federal Reserve has been another target for Erdogan’s efforts in recent weeks to secure financial assistance, as the Fed has rolled out temporary dollar swap lines with 14 central banks around the world in an attempt to inject dollars into markets. The Fed’s action is part of an unprecedented effort to ease the strain of the global financial system, but to date Turkey has not been included. Senior US officials noted that Ankara has been in direct contact with the Fed, but added that Turkey’s eligibility will be based solely on financial criteria, and not politically linked.

Nevertheless, the Turkish government has sought to smooth over tensions with Washington, sending two donations of medical supplies to the US and quietly dropping a promise to activate the Russia S-400 air defence system in April. The two countries are coordinating their policies on Syria, and currently have a shared interest not to let Idlib fall into the hands of the Assad regime; also, the two are interested in advancing a political solution to the Syrian conflict, and share some common interests regarding Iran. While Iran is not targeting Turkey, Ankara does view Iran as a rival, and President Erdogan has stated recently that Iran is not a friendly power. There are also common interests when it comes to Libya, NATO, Black Sea Caucus states, and Iraq.

Notwithstanding, disagreements still persist in northeastern Syria, where the US and Turkey do not see eye to eye on the issue of the Syrian Kurds; Turkey’s relations with Russia are also complicated and not viewed favourably by the US. Specifically, the S-400 purchase is the main bone of contention. A senior US official said in mid-May that it is a ‘huge, extremely complicated, issue’, which is ‘directly connected to America’s biggest defense investment since WWII’ (the F-35 fighter jet project); finally, human-rights abuses and the erosion of democratic institutions in Turkey make the country a ‘hard sell’ in Washington at present.

Will Erdogan’s charm offensive bear fruit?

In recent days, the Turkish lira has strengthened (to 6.8240 lira to the dollar), and analysts attribute it to the tripling of the Qatari–Turkish swap line, as well as the hope that Turkey will establish and secure additional swap lines with foreign central banks. While Erdogan is clearly on a charm offensive, his efforts vis-à-vis Europe and the US have not yet yielded the results he was hoping for. As he continues to reject the IMF assistance package, the US and European financial institutions are not relaxing their strict criteria for establishing swap lines. Erdogan is not willing to make concrete changes in his economic policy nor take the necessary steps required to meet these criteria. He was handed a temporary financial lifeline by the Qataris, but will need to secure additional funding soon. The slight increase in the lira’s value will be put to the test in the very near future.