Turkish Prime Minister Ahmet Davutoglu leaves a news conference at his ruling AK Party headquarters in Ankara, Turkey May 5, 2016. REUTERS/Umit Bektas
Ahmet Davutoglu leaves a news conference in Ankara on Thursday © Reuters

Turkey’s long-promised economic reforms have come to a halt with the removal of Ahmet Davutoglu, its prime minister, as President Recep Tayyip Erdogan focuses instead on cementing his grip on power.

The reforms included an overhaul of the Turkish labour market, the rollout of a government-mandated retirement scheme and the development of Turkish bond and equity markets to make it easier for local companies to raise capital.

Mr Erdogan last week ousted Mr Davutoglu who championed these and other reforms, including those designed to bring Turkey closer to the EU. The fate of other economic reformers allied to the prime minister, such as Naci Agbal, finance minister, and Mehmet Simsek, deputy prime minister, who oversees the economy, was unclear.

“Recent events confirm an overriding focus of the Turkish government on constitutional reform,” said Frank Gill, credit analyst at Standard & Poor’s. “This risks sidelining critical economic reforms to address Turkey’s low savings rate, its highly unproductive agricultural sector, its inflexible and underskilled labour market and its weak record post-2006 in attracting foreign direct investment into sectors outside of construction and banking.”

Technocrats in the finance ministry privately lament that reforms are losing steam just as the economy is performing well. Growth in the final quarter of 2015 was 5.7 per cent, the fastest since 2011.

While Mr Erdogan has in the past supported economic reform, he has become intent on shoring up his power, controlling dissent from journalists and academics, and sidelining political opponents as he secures backing for a referendum designed to widen the powers of the presidency.

Postponing or dropping reforms would leave Turkey increasingly dependent on its consumption-driven growth, which revives current account deficit when growth picks up, and will make it difficult to reduce unemployment, which is at more than 11 per cent.

Mr Simsek, a former finance minister, earlier this year assured investors that difficult legislation to overhaul blockages in the labour market, in retirement savings and in capital markets was imminent.

Two insiders from the ruling Justice and Development party (AKP) said that Berat Albayrak, the president’s son-in-law and minister of energy, was being considered for Mr Simsek’s position. The deputy prime minister declined to comment.

Even if Mr Simsek remains in office, there is scepticism that he will be able to push unpopular and fiscally expensive reforms through the AKP.

Murat Ucer at the Global Source Partners consultancy said: “Simsek was in essence buying Turkey time, speaking the right language to keep investors interested, but his challenge was always between what he wanted to deliver and what was politically possible. Even if he stays, his hand will be even more weakened — there is only one thing right now driving the agenda, which is the executive presidency.”

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