The announcement ends months of speculation about a new centre-right party led by Babacan, who resigned from the ruling AKP in July after citing deep differences.
Babacan was a founding member of the AKP, and steered the economy as a deputy prime minister during a period when the ruling party was considered a model for the region.
Rumours have circulated in Turkey for years that Babacan and other former AKP heavyweights could be plotting a challenge to Erdoğan. The dissent finally took shape after the AKP’s poor performance in local elections this year.
The project has the support of another founding member of the AKP, former President Abdullah Gül, though he will not formally participate in the new party.
Babacan said the new party would be launched by the end of the year, but that his team would not act before carefully assembling the party’s staff and putting together policies.
The former deputy prime minister said the AKP had abandoned its founding principles and ushered in a return of judicial, economic and human rights problems that had plagued Turkey when the party was formed in 2001.
"We always highly valued transparency and ethics in politics and public administration. When we saw problems in these areas we created broad-ranging initiatives to deal with them," Babacan told Karar journalists Ahmet Taşgetiren and Yıldıray Oğur.
"But in truth, seeing that our efforts have not succeeded has been a great disappointment. This wasn't what we dreamed. We wanted a very different Turkey, a very different approach. It wasn't a personal disappointment, but one for our country," he said.
The same drift away from the party’s founding values has also led to economic problems that saw Turkey enter a recession last year, Babacan said.
“I’m talking about a deviation that started in 2011 and accelerated particularly after 2013,” Babacan said.
The AKP faced a challenge to its rule in 2013 when nationwide protests were followed by corruption probes launched against ministers by police and prosecutors said to be part of a clandestine religious network. The year also marks the beginning of the ruling party’s slide into overtly authoritarian practices.
Economic actors’ trust in the government had eroded since then, and to regain it requires transparency and a revival of the country’s institutional reputation, he said.
“Turkey has to be an open country with an open economy. When it closes itself off, it becomes poor and its democracy weakens,” he said.
For Babacan, this also means addressing concerns about Turkey’s rule of law. Judicial independence and the separation of powers have come under the spotlight in the country, where a new executive presidential system inaugurated last year has tied the country’s most important institutions to the presidency.
Babacan is joined in his concerns about the ruling party by Ahmet Davutoğlu, another former leading figure who crafted the party’s foreign policy approach as foreign minister and then led as prime minister before being forced to resign over disagreements with Erdoğan in 2016.
Davutoğlu openly voiced his dissent this year, leading to his expulsion from the AKP earlier this month. He is also expected to form a new political party this year.
The defections are likely to pile pressure on the AKP, which only commands a parliamentary majority through its alliance with the far-right Nationalist Movement Party (MHP).
Though elections are not due until 2023, the need to win more than 50 percent in presidential elections also mean any split from the AKP’s voter base will be a great concern for Erdoğan, who has called party rebels traitors.