Prof: Ümit Akçay: Simsek’s USA crusade and his contradicting views with CBRT head Karahan
karahan-simsek
A Packed U.S. Visit by Mehmet Şimşek and His Team
Last week, Treasury and Finance Minister Mehmet Şimşek and his economic management delegation undertook an extensive visit to the U.S. to attend the IMF and World Bank annual meetings and the G20 summit. This visit, coming after the March 19 operation of Ekrem Imamoglu’s arrest, was not merely a routine round of international meetings.
According to Şimşek, over 60 meetings were held during the trip. These included one-hour meetings with three major international credit rating agencies, speeches at conferences organized by global investment banks in New York, meetings with the World Bank, the Asian Infrastructure Investment Bank, and the Islamic Development Bank, as well as presentations at various think tanks.
A Mission of Damage Assessment and Repair
As can be inferred from this intense schedule, the visit can be considered a “damage assessment and repair” mission. (For a broader assessment on this topic, see last week’s episode of Kriz Notları.) In this article, I will focus on the outcomes of Şimşek’s U.S. visit and its potential economic and political implications for the period ahead.
The Impact of March 19-Imamoglu’s arrest
First, let’s look at what was discussed during the meetings. As expected, the main topic was the March 19 operation and its consequences. According to Şimşek, international investors primarily focused on whether the economic program was resilient to domestic political developments. The response given was that “There is no decline in political support for the program.”
Şimşek noted that investors were less concerned about the “lack of democracy” or problems with the “rule of law” and more interested in whether the economic policy—which offers a kind of profit guarantee—would continue. Indeed, the economic policy based on real appreciation of the Turkish lira and suppression of real wages had created attractive returns for foreign investors post-2023. Investors’ concern was whether this favorable opportunity would continue. Based on the assurances given, it appears that these attractive conditions will persist for at least some time.
Central Bank Reserves in Focus
Another issue raised in meetings with investors in the U.S. was the Central Bank of the Republic of Turkey’s (CBRT) reserves. As is known, in the period following March 19, about $50 billion of CBRT reserves were used to prevent the depreciation of the Turkish lira. This development has once again placed the CBRT’s reserves in the spotlight.
In his statements, Şimşek confirmed the reserve losses but emphasized their composition. According to him, 58% of the reserve loss was due to foreign outflows, and 34% resulted from corporate demand. Household demand, on the other hand, appeared to be limited. According to the minister, household-sourced reserve losses were around 7–8%. Compared to the currency crises in 2018 and 2021, household demand for foreign exchange appears to have been less influential this time.
Şimşek presented the limited household shift to foreign currency as “evidence of the public’s trust in the program.” However, the effect of interest rate hikes and the parallel rise in deposit rates likely played a significant role in limiting this shift.
A Telling Admission on Reserves
Finally, I would like to highlight an interesting statement by Şimşek on the issue of reserves. He said:
“Of course, there is a reserve loss, because we did not accumulate these reserves through current account surpluses. We accumulated them mostly through domestic portfolio preferences and, to some extent, foreign investments.”
This statement can be seen as a kind of confession. It is known that using central bank reserves as a buffer against capital outflows came into focus after the 1997 Asian Crisis. Since then, many countries have accumulated reserves as protection against the negative effects of capital movements. However, Şimşek’s remarks reveal that reserve accumulation in countries with current account deficits is akin to building sandcastles—structurally fragile and unsustainable.
The Karahan-Şimşek Contradiction
Let’s briefly pause our assessment of the U.S. visit and listen to what Fatih Karahan, the Governor of the Central Bank of the Republic of Turkey, said at the CBRT’s 93rd General Assembly Meeting. In his presentation, Karahan stated that they closely monitor demand indicators and will take necessary measures if domestic demand starts negatively affecting disinflation.
According to this approach, the main cause of inflation is domestic demand developments. To reduce inflation, domestic demand needs to be subdued. Karahan made it clear that the CBRT would not hesitate to increase interest rates if domestic demand showed signs of revival.
Now, let’s return to Şimşek’s U.S. trip. One of the questions posed by international investors, according to Şimşek, was how Turkey would be affected by rising uncertainties and trade wars. Şimşek claimed that Turkey would not be negatively affected by trade wars. The main reason? Turkey’s economic growth is not dependent on exports. In fact, looking at the sources of economic growth in Turkey, it is known that domestic demand is the main driver.
However, this reveals a serious contradiction: while Şimşek argues that Turkey will not be affected by trade wars because its economic growth is based on domestic demand, Karahan points out that inflation is also driven by domestic demand and signals that they will suppress this demand to curb inflation.
A Fundamental Dilemma for Economic Policy
This Karahan-Şimşek contradiction will become a fundamental dilemma for economic policy in the period ahead. Should demand be further suppressed to reduce inflation, or should domestic demand be supported to stimulate economic growth? The way this question is answered will shape the course of both economic and political developments—and, conversely, economic and political developments will also shape the answer to this question.
We will continue to monitor these developments…
About the Author:
Assoc. Prof. Dr. Ümit Akçay has been teaching at the Berlin School of Economics and Law since 2017 and works as a researcher at the Berlin Institute for International Political Economy (IPE Berlin). Akçay completed his undergraduate studies in Public Administration at Istanbul University’s Faculty of Political Sciences, and his master’s and Ph.D. in Development Economics and Economic Growth at Marmara University’s Institute of Social Sciences.
He is currently interested in the political economy of growth models, central banking and financialization, and the political economy of new authoritarianism. Previously, he worked at Istanbul Bilgi University, Middle East Technical University, Atılım University, New York University, and Ordu University. Akçay is the co-author of Financialization, Debt Crisis and Collapse: The Future of Global Capitalism (Notabene, 2014), and author of Money, Banking, State: The Political Economy of Central Bank Independence (SAV, 2009) and Planning Capitalism: The Transformation of Planning and the State Planning Organization in Turkey (SAV, 2007). His international publications have appeared in journals such as Cambridge Journal of Economics, Contemporary Politics, Globalizations, International Journal of Political Economy, and European Journal of Economics and Economic Policies.
