Among the measures passed by the government of the day to tackle the crisis was a law granting autonomy to the Central Bank of Turkey. Süreyya Serdengeçti was appointed the same year as the governor of the central bank and during his five years in office the Turkish lira was revalued and gained strength against the dollar, while inflation was brought under better control.
When his term came to an end all eyes turned to the AKP, which came to power in 2002. Naturally, the party did not want to miss the chance to appoint an ally as the new central bank governor. “[The] AKP did not want to attribute the economic success to the program of the IMF. In their eyes it was all their doing and so they wanted to work with someone close to them at the helm of the central bank,” said economist Uğur Gürses.
When the president of the day, Ahmet Necdet Sezer, a staunch secularist, vetoed the AKP’s candidate, the government had to settle for Durmuş Yılmaz, a career central bank member. Although critics of the AKP feared Yılmaz would compromise the bank’s autonomy, he proved to be relatively resistant to growing government pressure for lower interest rates.
Yilmaz was also fortunate that Prime Minister Recep Tayyip Erdoğan was relatively restrained in his criticism of the central bank’s tight monetary policies. It was Yilmaz’s successor, Erdem Başçı, who had to face an outright assault from Erdoğan and his loyal supporters in the cabinet when he took over the post in 2011.
“I don’t have the authority to intervene in the central bank,” Erdoğan said in 2011. “But I am the one on the field, not the central bank. I am in front of the people. When someone is aggrieved with interest rates, that person does not go and find central bankers, but they come and find me.”
Başcı has tried to find the middle way. “On the one hand he is aware of the importance of tight monetary policy, but on the other he does not want to antagonize the prime minister,” said economist Gürses.
Başcı raised Turkey’s benchmark interest rate by 550 basis points in January to stem losses to the lira. He then lowered the benchmark by 125 basis points, most recently to 8.75 percent last month.
Despite his attempts to tread a fine line, the central bank governor has still had to face the prime minister’s ire. “You raised the interest rate by five points all at once, but now you reduce [it] by only half a point. Are you kidding?” Erdoğan complained to a group of reporters last month.
While rumors have been circulating that Başcı was being forced to resign, Economy Minister Ali Babacan, as well as Finance Minister Mehmet Şimşek, have tried to defend him, yet their statements remained rather tame in comparison to those of Erdoğan, who does not mince his words. A recent statement, that if interest rates fall the inflation rate will also fall, sent shock waves among Turkish economists, who have been arguing exactly the opposite.
Ever since he entered government, Erdoğan has been fighting—in his own words—the “interest rate lobby,” an imaginary group of enemy economists he has been unable to fully define. When Turkey’s youth demonstrated in the streets protesting his authoritarian tendencies, he said this was partly due to the doings of the “interest rate lobby.”
Monetary policies being discussed in the political arena is not unique to Turkey, but markets need to know that central banks are ultimately independent, the World Bank’s Turkey director Martin Raiser told The Majalla.
“What the markets need to know is that the central bank has a mandate to guarantee price stability and sets interest rates in view of this mandate, not in view of other political considerations. Unfortunately, the discussion in Turkey has sometimes raised questions over the extent to which [this] is the case,” he said.
The independence of regulatory bodies is a key part of the checks and balances and separation of powers crucial for the functioning of democracies. But Erdoğan has openly criticized the separation of powers, and has tried to erode the independence of institutions like the judiciary as well as economic regulatory bodies.
The central bank’s fate, and therefore Turkey’s economic future, is closely tied to the outcome of the presidential elections set for August. If Erdoğan is elected president and a loyalist is named prime minister, the central bank will continue to face pressure, especially in view of the upcoming general elections next year. This is a scenario that worries both domestic and foreign investors.
All views expressed in this blog post are those of the author and do not necessarily represent the views of, and should not be attributed to, The Majalla magazine.