Turkiye goes to the polls on Sunday for presidential and parliamentary elections with incumbent leader, President Recep Tayyip Erdogan, fighting for his political life. After two decades in power, he is facing a united opposition of six parties which is determined to oust him. Opinion polls show the two sides running neck and neck.

For many voters the troubled economy is their biggest worry. Both sides in the forthcoming election have radically different plans for tackling the problem.

Early reform

The ruling AK party of President Erodogan came to power in 2002 in the wake of a financial crisis caused by high levels of government debt and a liquidity gap at Turkish banks. In response, the AKP prioritised market reform, backing state privatizations and spending cuts. The policy paid off with growth averaging over 7 percent a year in its first administration. In the wake of the 2008 global banking crisis, Turkiye received a further boost from the rush of funds into emerging markets.

Rate cuts

However, the fiscal squeeze by the US Federal Reserve in 2013 coincided with the anti government protests at Istanbul's Geze Park, spooking foreign investors. In response, Erdogan's government turned to domestic alternatives, promoting export-led growth, and Turkiye's potential as a "near shore" low-cost manufacturing hub for overseas firms.

To boost lending, Turkiye's central bank also began aggressively cutting interest rates. The cost of borrowing fell from 24 percent in 2019, to 8.5 percent now. This glut of cheap liquidity has pushed the official inflation rate to 85 percent in October, while the lira has halved in value against the dollar over the past twenty months. Many households have seen the value of their savings wiped out and are struggling to meet basic living costs.

READ MORE

EXPLAINER: Could Türkiye's president Recep Tayyip Erdogan be about to lose power?

Public brawls, voter intimidation: Turks abroad wrap up voting in tense election

Türkiye elections: Erdogan returns to campaign trail after illness

Erdogan's economic plans

As part of his offer to voters, Erdogan is holding fast to his 'New Economy Model,' prioritizing exports and cheap loans. Erdogan has told voters: "As long as this brother of yours is in power, interest rates will not be raised." In its manifesto, the AKP has pledged to boost GDP to 5.5 percent by next year and bring down inflation to single digits.

Opposition offer

The six party 'National Alliance' headed by Kemal Kilicdaroglu has instead pledged to rebuild investor confidence in the Turkish economy if it succeeds in Sunday’s poll. The veteran Republican leader has vowed to return to orthodoxy, backing what he calls "rational economic policies."

Crucially this means giving independence to the central bank to set interest rates as its own economists see fit.

However, there are concerns that a double digit rate rise to cool inflation could spark a recession risk early in the new administration. Meanwhile, a sell-off of government bonds would hit local lenders who now overwhelmingly hold these borrowings.

Timothy Ash, emerging market sovereign strategist at BlueBay Asset Management told CGTN that whoever wins on Sunday the markets will remain volatile.

"If the AKP wins we can expect to see the lira weaken," he said "Erdogan will not hike rates and we are back to the perennial balance of payments problem, or a bigger systemic crisis. But if the opposition wins we will see short term pain as rates go up. In the longer term, however, the lira should begin to stabilise and the outlook will improve."

Subscribe to Storyboard: A weekly newsletter bringing you the best of CGTN every Friday