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By Bloomberg

One of Turkey’s most effective economic reforms of recent years may be about to come apart.

In an effort to curb a consumer debt burden that was ballooning by an average of 50 percent a year, the banking regulator at the start of 2014 limited credit-card providers from taking payment by installments for purchases of expensive import items like phones and jewelry. The measures helped to cut the biggest current-account deficit in the Group of 20 nations and cooled consumer lending, winning Turkey praise from credit raters and the International Monetary Fund. Now, with economic growth slowing and an election looming, the regulator says it may relax the rules.

“It’s very dangerous to allow any form of credit to surge again,” said Paul McNamara, an investment director at GAM UK Ltd. in London, who manages $5 billion in assets including a “very underweight” position on Turkey. This “smacks of desperation,” he said.

The prospect of loosening consumer credit flies in the face of calls for tighter monetary policy from analysts as the plunging lira threatens to reignite inflation. Any adjustment would be the first major policy change from Mehmet Ali Akben, a career Islamic banker appointed in May to head a regulatory body he said needed to become “more supportive of production.”

Achieving that objective has become more pressing with the economy struggling at growth below 3 percent for the past four quarters. Even so, economists say that relaxing limits on easy credit will fuel the wrong kind of growth. Since the curbs on installments were introduced, the outstanding amount of such debt has dropped by a third. Turks had racked up 48 billion liras, then about $22 billion, of deferred payments even for goods like gasoline and groceries. The use of such credit is now banned outright for these items.

Lira’s Retreat

The AK party, co-founded by President Recep Tayyip Erdogan, is under pressure to bolster the economy as Turkey heads into repeat elections scheduled for November, after more than two months of coalition talks failed to produce a deal. The lira has dropped 20 percent this year, the third-worst performing emerging market currency globally, while a slump in bonds has increased two-year yields the most among peers.

“Turkish economic growth was substantially carried by consumption and construction," said Wolf-Fabian Hungerland, a Hamburg-based economist at Berenberg Bank. “But since the tide in global liquidity is changing, the AKP’s business model is struggling. Loosening the current regulation on consumer credit is an attempt to get this business model running again, especially now, with the elections ahead."

Cash-strapped voters wouldn’t be the only beneficiaries of a change in rules. “Banks with strong credit-card businesses,” including Yapi Kredi, Garanti, and Akbank, would also receive a windfall, according to Oyak Securities analyst Aykut Ahlatcioglu. The Borsa Istanbul’s XBANK index has lost 22 percent since the start of the year, with the foreign exodus from stocks and bonds reaching a net $5 billion.

Lenders complaining of declining profit margins have been lobbying heavily on the issue. They were joined earlier this week by Bendevi Palandoken, head of the confederation of Turkish Tradesman and Craftsmen, who said a relaxation would allow consumers and businesses to “breathe easy.” The small businesses representative said that regulators should also look at extending the maximum maturity of consumer loans, in order to jump-start the economy.

Jewelry Purchases

Under pressure from Istanbul’s chamber of jewelers, Turkey relaxed the ban on installments for those items in October. Payments can now be deferred for up to four months.

Akben, the regulator, said the mooted change was about transparency, according to an interview with state-run Anadolu Agency. Still, with polls suggesting no substantial change in voting intentions in the new election, the political deadlock is an important factor in the debate, according to Mert Yildiz, an economist at Roubini Global Economics.

The run-up to June’s inconclusive vote featured a bidding war from opposition parties to lift the minimum wage, currently about 1,000 lira a month ($340) after tax. There are indications that “pressure groups within the AKP are pushing for increased spending on households, in a bid to avoid losing votes to populist parties,” Yildiz said.