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Jan 11, 2017 | 21:51 GMT

Turkey: Where Economics Will Meet Politics

Efforts by Turkey's ruling party to replace the country's parliamentary system with an executive presidency are quickly progressing. Earlier this week, Turkish Parliament began debating the constitutional amendments that the ruling Justice and Development Party (AKP) presented in December. Late Jan. 10, it passed two of the 18 articles in the amendment package — one that deals with the courts and another that increases the size of the parliament from 550 members to 600 members. To pass the remaining articles through parliament, the AKP will need support from the Nationalist Movement Party (MHP). Once they have passed in the legislature, the amendments will then have to be approved in a public referendum to be implemented. The AKP's goal is to pass the amendments through parliament by the end of January so they can be put to the public vote in April. But when Turkish voters head to the polls, politics will not be the only thing on their minds.

Turkey is suffering serious economic problems, which stem in part from security and terrorism concerns and from Turkish President Recep Tayyip Erdogan's efforts to consolidate power for himself and his party. The Turkish lira is the worst performing currency so far this year, falling 9 percent this month alone and nearly 20 percent over the past two months. The country also has an account deficit and a sizable dollar-denominated debt, made worse by the U.S. Federal Reserve's interest rate hike in December. So far, Ankara's efforts to support the national currency — encouraging the private sector to exchange its foreign reserves for lira and boosting foreign exchange liquidity by reducing reserve requirement ratios — have proved ineffective.

An interest rate hike would be more effective, but it would risk slowing the economy even more and could lead to higher unemployment. Moreover, a rate hike may not be politically possible: Erdogan strongly opposes raising rates and has historically intervened in the central bank's fiscal policymaking. Erdogan replaced the central bank governor last April after several disputes over monetary policy. With the referendum quickly approaching, he is likely to fight harder than ever to guide fiscal policy as he sees fit. Erdogan will not want to risk allowing an increase in interest rates at the expense of the constitutional amendments he needs to establish an executive presidency — even if it means prolonging Turkey's economic turmoil.

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