Erdogan's party divided over the economy

A few days before the second round of presidential elections, Tayyip Erdogan's government is divided and uncertain about whether to maintain or abandon an economic program that some consider unsustainable. This was reported by the Reuters agency, citing government officials and other knowledgeable persons.

According to information from the agency, an informal group of members of the ruling party gathered last week to discuss how it could adopt a new policy of gradually increasing interest rates and a targeted lending program.

Erdogan is not directly involved in the negotiations, which involve some members of the ruling AK Party who are not in the government but have held high positions in the past, said the sources, who insisted on anonymity.

On the other side are officials and ministers who say publicly that they want to maintain the current program of increasing exports and economic growth through rate cuts and strictly regulated currency, credit and debt markets.

With Erdogan in the lead after the first round, much is at stake for the emerging market economy, which has been hit by a cost-of-living crisis and a series of currency crashes.

Erdogan is not directly involved in the negotiations, which involve some members of the ruling AK Party who are not in the government but have held high positions in the past

With foreign reserves dwindling, some analysts say Turkey could face another economic meltdown as early as this year, sending inflation soaring again and straining its balance of payments unless the government changes policy.

"They are studying a new economic model... given that the current one is unsustainable," said one senior official. "Essentially, he would gradually increase the interest rate and end the structure of using multiple rates". The official said the group had not yet presented Erdogan with a complete plan.

Erdogan, who is seeking to extend his rule to a third decade in a runoff election on Sunday, has said during the campaign that interest rates will be lowered as long as he is in power and that inflation will be brought under control.

All sources said there was no indication that Erdogan had made a decision, with most saying he had been raised earlier with concerns about mounting economic pressures and depleted foreign reserves.

Three sources said he could keep the current policy at least for the next few months, encouraged by the better-than-expected results of the May 14 vote. He won 49,5 percent of the votes in the first round, and his rival Kemal Kilicdaroglu 44,9 percent. Analysts say the president is in a good position to win the runoff.

"There are two different opinions within the party," an AK Party official told Reuters. He added that the goal of any decision will be to preserve economic stability until the next key electoral test - the local elections in March next year.

A third official said a strong election result could eventually convince leaders "that rapid change is not necessary."

Economists say that the lira has lost almost 80 percent of its value against the dollar in five years, mainly due to Erdogan's economic policies. Kilicdaroglu's opposition alliance promises to reverse Erdogan's program by aggressively raising rates and returning to free market principles, which Reuters reports has pleased international investors.

The goal of any decision will be to preserve economic stability until the local elections in March next year

Although a self-proclaimed "enemy" of interest rates, Erdogan has occasionally taken a more conventional approach when dealing with past economic crises, only to revert to the old ways.

An informal group working on the new plan is not considering aggressive monetary tightening, but a more gradual path that re-emphasizes the benchmark interest rate in loan markets, four sources told Reuters. Another option is to use public institutions and state subsidies to approve selective loans, they added.

Several ideas have been considered, the details of which are unknown. It is not known whether that group presented the plan to Erdogan, nor how interested he is in it.

The Fitch agency said Turkey's "B negative" credit rating depends on whether post-election policies "become more credible and consistent" given pressure on the lira, a large current account deficit, dwindling reserves and high inflation.

Analysts believe that it is not excluded that Erdogan will change the economic policy to some extent, but that the basis of his economic beliefs will remain the same. The president hinted at a possible change ahead of the election when he said former finance minister Mehmet Simsek, well-known to international investors, could return to the government to help shape policy. However, it remained unclear what Simsek's role might be if Erdogan wins the runoff.