Political and financial turmoil set to dominate Turkey, risking economic stabilization plans

More than 1,100 people have been arrested in Turkey’s nationwide protests since demonstrations began on March 19, Turkish authorities said Monday, as political and economic instability grips the nation of 85 million following last week’s arrest of Istanbul Mayor Ekrem Imamoglu.

What lies ahead for Turkey is highly uncertain, but analysts expect a prolonged period of volatility for the Turkish lira and the foreign reserves that the country will need to burn through in order to keep it afloat.

Central bank officials spent $12 billion in foreign reserves last week to prop up the lira, the Financial Times reported as of March 21, after the currency hit a record low of more than 40 to the dollar. Markets initially plunged on news of the arrest, and Turkey on Sunday banned short selling and relaxed buyback rules in an effort to bolster stocks.

“The protests mark the most significant and widespread public reaction in over a decade, making the trajectory of events difficult to predict,” Wolfango Piccoli, co-president at advisory firm Teneo, wrote in a note out Monday.

“What is evident, even at this early stage, is that political uncertainty is far from over,” he said. “Once again, President Erdogan’s political agenda has inflicted serious damage on Turkey’s economic outlook.”

Widely considered the strongest political rival of Turkish President Recep Tayyip Erdogan, Imamoglu was arrested on counts of corruption just days before he was expected to be nominated as his party’s candidate for the presidency. He and his supporters reject the charges, saying they are politically motivated.

Economists are concerned that investor confidence is being dealt a blow that will undo the last roughly 21 months of work by Turkey’s finance leaders in returning to orthodox monetary policy and turning around the country’s runaway inflation problem.

Finance Minister Mehmet Simsek, appointed in June of 2023, is now having to implement emergency measures like spending record levels of foreign currency reserves to bolster the ailing lira, complicating his longer-term economic stabilization plans.

“A significant amount of the foreign reserves, built up over the last year, has been evaporated in a matter of days,” Burak Dalgın, a member of parliament representing Balıkesir, told CNBC. “That is certainly a blow to Simsek’s economic program. You save it up by the spoon and you throw it away by the shovel.”

Meanwhile, Erdogan’s broader crackdown on opposition activity is intensifying. Since Imamoglu’s detainment, Turkey has imposed travel restrictions on Istanbul to curb protests, closing bridges and throttling internet access, and Turkish state media outlets are not acknowledging the protests in their coverage.

Arda Tunca, an independent economist and consultant based in Istanbul, told CNBC that the country is approaching a point of no return.

“Turkey is on the verge of becoming a dictatorship. People’s reaction to what has been going on since March 18 will determine the fate of the country’s future,” Tunca said. “No leader, democratic or not, can silence the will of people sooner or later.”

Erdogan for his part has maligned the protesters, saying over the weekend that his government would not “surrender” to “vandalism” or “street terror” ahead of more planned demonstrations, according to Reuters.

He said Monday that protests had turned into a “movement of violence,” and vowed that Turkey’s main opposition party, the Republican People’s Party (CHP) — to which Imamoglu belongs — would be held to account for injured police officers, of which the Interior Ministry says there are more than 120.

Critics of Erdogan inside and outside of Turkey have for years warned about what they see as a gradually increasing erosion of democratic rights and norms under the 71-year-old leader, who has been in power for more than 20 years — first as prime minister from 2003 to 2014, and then as president from 2014 onward.

“What is becoming increasingly clear is Erdogan’s willingness to steer Turkey toward full autocracy, moving away from the competitive authoritarian model that has characterized the country’s governance over the past decade,” Piccoli at Teneo wrote.

If Erdogan’s ruling Justice and Development Party (AKP) “were truly confident in its electoral dominance, there would be no need to neutralize Imamoglu so prematurely,” he said, noting Turkey’s presidential elections are not until 2028. The AKP may be taking a bet that popular anger will have subsided by that point; but the move also may serve to deter future political hopefuls from becoming serious rivals to Erdogan for the presidency.

“Imamoglu’s prosecution thus extends far beyond the fate of a single politician,” Piccoli wrote.

“It raises a fundamental question about Turkey’s political trajectory: whether the country will continue to uphold even weak democratic norms or accelerate its slide into authoritarian rule,” he added.