Emre Tarim, Lecturer in Behavioural Sciences, Lancaster University.
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The Turkish lira has once again made global headlines, with a steep drop of 15% on March 22, running from below 7.20 to the US dollar to over 8.28, before settling just below 8.00. This came on the back of a midnight decree on March 19 by the Turkish president, Recep Tayyip Erdogan, to sack Naci Agbal, the governor of the central bank.
This is the third time Erdogan has sacked a governor since being elected the first executive president of Turkey in June 2018. Such a turnover of governors in the age of independent central banks is unusual.
It helps to understand that the president and his brand of “folk economics” argues that high-interest rates cause high inflation. This is contrary to economic orthodoxy, which would say that raising interest rates is the remedy for inflation. Agbal was dismissed a day after hiking interest rates.
The three governors
The first governor to serve under Erdogan was Murat Cetinkaya. He was sacked in July 2019 for allegedly refusing to cut interest rates, citing the bank’s independence.
He was replaced by Murat Uysal, who instigated sharp interest rate cuts after coming into office. This brought rates into negative territory once inflation is factored in.
This may have chimed with Erdogan’s views on economics, but the markets and the economy had other ideas: there followed a cheap credit boom, which stoked inflation and saw the lira weaken to the point that it hit historical lows against the US dollar and euro. In November 2020, Uysal was summarily dismissed.
Turkish lira vs US dollar
When Naci Agbal replaced Uysal, investors were cautiously optimistic. Agbal had been the minister of finance and economy in the final cabinet of Turkey’s parliamentary system, before it was replaced by the executive presidency in 2018.
On assuming the central bank governorship, he reversed the low-interest rates policies of his predecessor and started raising rates instead. He repeatedly stressed the importance of price stability and low inflation as the central bank’s two legal mandates since 2001.
Not only was Agbal saying the right things, but he also seemed to have the president’s endorsement. Only two days after Agbal had assumed the governorship, Erdogan’s son-in-law, Berat Albayrak, who had overseen Erdoganomics for almost three years as minister of finance and economy, infamously resigned via his Instagram account.
Former party insiders claimed that Agbal had been critical of Albayrak’s policies, including restrictions on having a free-floating currency and the alleged sale of USD 128 billion in central bank reserves to prop up the free-falling lira. These had led to significant capital outflows and growing questions about whether Turkey was a viable emerging market for foreign investment.
Meanwhile, Erdogan has been stressing the importance of price stability and market-friendly economic governance in various speeches during Agbal’s tenure. It all seemed to suggest that Erdogan had U-turned on his unusual economic beliefs. Perhaps three years of low-interest rates, high inflation, and heady boom and bust cycles might finally have been coming to an end.
Investors responded by ploughing an estimated USD 15 billion into the Turkish capital markets since Agbal’s appointment. Over the period, the lira appreciated more against the US dollar than any other emerging markets currency. But following a final interest rate hike to 19% to tame inflation whose official rate of nearly 16% is allegedly underreported, Agbal has turned out to be the shortest serving governor under Erdogan so far.
Where next
This is not an easy time to be taking over the management of Turkey’s economy. As well as the high inflation and high-interest rates, Turkish savers seem to have lost faith in the lira as their foreign currency holdings reached record levels in 2020. None of this bodes well for a country with a sizeable private and public debt of some USD 440 billion owed to foreign creditors and mostly denominated in US dollars.
The new central bank governor is Sahap Kavc?oglu. He is a former banker and a current professor of banking and finance. He is a columnist in a pro-government newspaper, which on its front page accused Naci Agbal of a conspiracy against the Turkish economy a day before he was sacked.
Kavc?oglu has written columns supporting Erdoganomics, including its low-interest rates low inflation theory. One can therefore easily understand why he has been appointed. We will probably see successive interest rate cuts starting from April when the central bank’s monetary policy committee gathers for its regular monthly meeting.
This will probably be followed by another economic boom fuelled by cheap credit alongside runaway inflation on the way to the second presidential election in 2023. Given the unsoundness of Erdoganomics for an open economy like Turkey, we will probably also see new record lows for the lira along the way.
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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