For many years, it wasn’t the economy that determined voting behaviour in Turkey. The country’s president, Recep Tayyip Erdogan, won almost every election he contested despite a deteriorating economic outlook. This is commonly explained by the importance of identity politics in a country that has been polarised by the policies of Erdogan’s ruling Justice and Development (AK) Party over its 22 years in power.

However, Erdogan’s streak came to a screeching halt on Sunday March 31 following Turkey’s local elections. His AK Party lost the popular vote for the first time since 2002 and the main opposition group claimed victory in key cities including Istanbul and Ankara. The reason why this time was different lies in the huge accumulated costs from years of policy mistakes that are now beginning to bite in a serious way.

So, what was the economic outlook as the country went to the polls? On March 21, Turkey’s central bank raised interest rates unexpectedly to 50 per cent. The move was the latest in a succession of rate rises that have followed Erdogan’s re-election as president in May 2023. It was viewed as evidence of the central bank’s determination to fight runaway inflation that is hovering close to 70 per cent. The rising interest rates have been widely applauded as a much-needed reversal from the unorthodox monetary policy that had gone on far too long.

Erdogan’s unconventional policy stance arose from his deep-held conviction that raising interest rates would increase inflation rather than reduce it. The pandemic and Russia’s invasion of Ukraine caused inflation to soar worldwide. While almost every central bank raised interest rates in response, Turkey went on an interest rate cutting spree. Keeping rates artificially low contributed to the rise in domestic inflation, and has made Turkey an inflation champion on a par with Argentina and Venezuela.

Emerging markets have been surprisingly resilient in the face of the global financial squeeze. Unlike in the past, many emerging economies have avoided huge fluctuations in their exchange rates, have not been subject to debt distress and have managed to keep inflation under control. One reason for this is the success of emerging economies in improving their policy frameworks, particularly by enhancing the independence of their central banks. More specifically, central banks in these countries have significantly improved their communication and transparency, and have become much better at forecasting inflation. As such, countries including Chile, Czech Republic and South Africa have outperformed their counterparts in advanced economies.

Sadly, Turkey was an outlier in this sphere. The country has completely ditched the independence of its monetary policy to such an extent that its central bank has had six different governors in the last five years. Politics has also played a disproportionate role in the making of economic policy. Changes to the Turkish constitution, which were put in place in 2018, gave Erdogan significant executive powers to push for very generous spending ahead of the 2023 presidential elections. Minimum wage rose substantially and costly pension schemes and subsidised housing projects were put in place.

This expansion in public spending naturally contributed to the inflationary pressures that were already brewing. Turkey’s outlier position in loose monetary policy, cutting rates between 2021 and 2023 while everyone else had been tightening, is the very reason why its central bank is now having to push rates up while others are just starting the easing cycle. Getting monetary policy wrong matters for most countries.

But it matters particularly for countries like Turkey that are highly open to trade and financial flows, and for whom exchange rate movements are a crucial source of fluctuation in the domestic economy. One of the biggest losers of Erdogan’s unorthodox monetary policy has been the Turkish lira. Over the past six years, the value of the lira has fallen dramatically against the US dollar.

In January 2018, you would have needed to part with 3.76 liras to purchase one US dollar. Today, this figure stands at 31.9 liras. Large fluctuations in the value of the lira matter for the Turkish economy for several reasons. First, a significant part of Turkey’s imports are inputs used in the production process, particularly of vehicles, machinery and mechanical appliances that make up nearly half of the country’s exports.

Any fall in the value of the lira will push up input costs and hence prices, reducing the competitiveness of the country’s exports. Second, Turkey imports a substantial part of its energy from abroad. In much the same way, any depreciation of the lira will make it more expensive to import energy. Third, Turkey is sitting on substantial external liabilities in foreign currency terms. This makes the depreciation of the lira even more costly. Any loss in its value magnifies the amount of resources required to repay a given level of foreign currency liabilities. Turkey’s return to more orthodox economic policy is good news.

But it is so overdue that even the sharp reversals in policy have not been sufficient to turn the tide on its economy, especially in the fight against inflation. Persistent inflationary pressures have forced citizens to increase their holdings of foreign currency, which has put further pressure on the lira. Facing a slowdown in foreign capital inflows, the authorities have had to burn significant amounts of foreign currency reserves to prevent the lira from depreciating further.

The sharp rise in interest rates on March 21 should be seen in a similar vein and as the price the country is having to pay for its past policy mistakes. More importantly, it has been nearly a year since Turkey returned to more conventional economic policy and there is no plan for a restructuring of the economy with proper institutional reform at its core. If proof is needed as to whether robust and independent policy institutions benefit economic performance, you need look no further than the recent resilience of other emerging economies. Brazil, for example, hasn’t only rebounded strongly from the pandemic. It has managed to control inflation and boasts one of the best performing currencies in the world.

(The writer is Professor of Finance, King’s College, London. This article was published on www.theconversation.com)