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Economist criticizes Turkey’s financial management despite recent interest rate hike

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Daron Acemoğlu, a prominent professor of economics at the Massachusetts Institute of Technology (MIT), on Sunday acknowledged that the Turkish Central Bank’s recent interest rate hike to 25 percent is a step in the right direction but criticized the government for not implementing broader reforms, which he sees as crucial to addressing the country’s economic woes.

In a series of posts on X, formerly known as Twitter, Acemoğlu called the 7.5 percentage point rate hike a “correct decision” but emphasized that Turkey’s path toward sustainable economic recovery remains fraught with challenges.

While he acknowledged the central bank’s commitment to fighting inflation, he said the move is insufficient for solving Turkey’s economic problems.

Questioning whether state banks would maintain real interest rates above zero, Acemoğlu stressed the urgency for institutional reforms to strengthen democratic rights and freedom of expression.

He said Turkey’s economy would continue to suffer without these reforms.

Acemoğlu expressed skepticism about the Turkish government’s ability to manage foreign investment effectively, suggesting that these investments should be brought in conjunction with institutional reforms to tackle the country’s economic challenges.

The MIT professor called for a more robust social security net to prevent a rise in poverty, which he sees achievable only through substantial institutional reforms.

He also pointed to deeper structural problems, such as inefficiency and technological backwardness, that must be addressed for a sustainable recovery.

“As long as these fundamental problems are not solved, wage increases and inflation triggers will continue, leading to persistent challenges such as poverty and unemployment,” Acemoğlu warned.

While recognizing that the interest rate hike signals the central bank’s renewed commitment to stabilizing the Turkish lira and combating inflation, Acemoğlu said the journey ahead remains uncertain.

“The rate hike is a step, but not the entire journey,” he said. “The deeper issues plaguing Turkey’s economy require multifaceted solutions, not just interest rate hikes.”

Acemoğlu’s remarks come amid ongoing economic turmoil in Turkey, characterized by rising inflation and volatility of the Turkish lira. The lira has lost around 30 percent of its value against the US dollar since late May.

Since national elections in May, the government of President Recep Tayyip Erdoğan has embarked on a new course in economic policy.

The central bank’s hike in the benchmark interest rate to 25 percent from 17.5 percent far exceeded economists’ expectations and signaled a shift away from Erdoğan’s unorthodox stance against high interest rates.

“All in all, it is a step in the right direction, but I think it is unclear whether it will be implemented. I think Turkey and the Turkish people are in for some difficult times,” Acemoğlu said.

Over the past several years, Turkey has been suffering from a deteriorating economy, with high inflation and unemployment as well as a poor human rights record. President Erdoğan is criticized for mishandling the economy, emptying the state’s coffers and establishing one-man rule in the country where dissent is suppressed and opponents are jailed on politically motivated charges.

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