The recent removal of the governor of Turkey’s Central Bank, which initially sent the lira tumbling by 14% and rattled global investors, has yet again brought into sharp relief President Recep Tayyip Erdogan’s long fixation with a debt-fuelled model of growth. The apparent reason why Naci Agbal, former finance and economy Minister, was eased out barely four months into his recent job was because he had raised the main rate of interest twice and too fast. Earlier in 2019, the term of Murat Cetinkaya, then head of the Central Bank, was ended a year prematurely because he had not reduced the lending rates soon and sharply enough. The legality of the decision was questioned by an opposition politician.
Undermining independence
Both instances underscore the extent to which Mr. Erdogan has systematically undermined the sanctity of the Central Bank’s independence. In a bid to shore up the country’s construction and consumption boom that has heavily relied on inflows of hot money, he has railed against high interest rates, dubbing them both the mother and father of all evil.
In one of the hallmarks of his executive presidency since 2018, Mr. Erdogan has argued, in a seeming negation of orthodox monetary policy, that higher interest rates indirectly stoked rather than slowed inflation. This unconventional stance has underscored Istanbul’s reluctance to draw lessons from the 2018 currency meltdown, when 30% of the lira’s value was wiped off, triggering skyrocketing inflation and the first recession in a decade.
When Mr. Agbal took over as the bank’s head in November, he inherited a much-weakened lira left behind by the former Finance Minister and Mr. Erdogan’s son-in-law Berat Albayrak. The currency had lost a quarter of its value to the U.S. dollar over the previous year, as investors withdrew huge volumes of lira-denominated bonds amid rising unemployment in the wake of the COVID-19 pandemic and more than 15% inflation. Istanbul has spent more than $100 billion to prop up the lira, eroding its foreign exchange reserves, prompting the ratings agency Moody’s to raise concerns about a potential balance-of-payments crisis.
While at the helm, Mr. Agbal introduced a 6.75 percentage point benchmark rate increase, and more recently, a 2 percentage point rise. Both moves were hailed as a return to monetary orthodoxy, leading to an appreciation in the value of the lira. These gains compare favourably with the situation following the 2018 currency crisis. A 24 percentage point interest rate hike resulted in a significant drop in inflation from 25% to about 15% in the following year.
The turnaround in inflation figures has evidently not influenced any real shift in the government’s position. On the contrary, Istanbul had last year taken recourse to proxy measures to raise the cost of borrowing and other unconventional steps to flatter its foreign exchange reserves.
The new incumbent at the Central Bank, Sahap Kavcioglu, a former legislator from the ruling Justice and Development Party (AKP), is known to share Mr. Erdogan’s unconventional monetary policy stance.
Observers, nonetheless, see hopeful signs in the Finance Minister’s promise following the recent slide in the currency to maintain price stability and Mr. Kavcioglu’s willingness to maintain the status quo at least until the next meeting of the Monetary Policy Committee in April.
Investors can do little else than clutch at these straws given Mr. Erdogan’s highly erratic ways, as is evident from the replacement of the Deputy Governor of the bank on Tuesday. The reaction from currency markets towards Mr. Agbal’s sudden removal would suggest that the decision could not have been more at odds with the President’s recent remarks regarding the government’s single-digit inflation target.
There are growing concerns over the implications of a potentially strengthening U.S. dollar following the Biden administration’s enactment of a $1.9 trillion economic stimulus package. The restoration of a semblance of stability to the volatile lira ought to top Turkey’s current priorities.
The author is Director, Strategic Initiatives, AgnoShin Technologies Pvt. Ltd.
Published - April 01, 2021 12:09 am IST
