By Iain MacGillivray
Turkey’s former Central Bank Governor Erdem Başçi has bowed out from his position after five years in the job, leaving behind an interesting financial legacy amid growing political pressure from the ruling government.
While Başçi managed to keep the Palace at bay and interference minimal, the appointment of his successor Murat Çetinkaya, a former deputy Central Bank governor with a background in political science and Islamic Finance, has many wondering whether Çetinkaya can resist the growing political pressure from the Palace to cut interest rates while trying to reduce Turkey’s continuing high inflation.
Turkey’s Monetary Policy is Fraught With Political Tension
Çetinkaya does not have an easy task ahead of him. Erdem Başçi also faced an impossible job of trying to maintain financial certainty through adopting tighter monetary policies and smoothing Turkey’s spiralling current account deficit. At the same time, he faced growing pressure from the government to cut interest rates to drive Turkey’s economic growth rate to around 5%. Over Başçi’s five-year stint, the Central Bank missed its inflation objective of 5% every year. As of January 2016, the inflation rate was 9.5%.
The constant and continuing battle between Başçi and President Recep Tayyip Erdoğan made many people question the independence of the Central Bank when Başçi’s term was set to expire. President Erdoğan promoted an unorthodox monetary policy regarding dealing with the Central Bank and the economy. He and his close advisors believe that high interest rates come from a sinister “interest rate lobby” that is out to hurt Turkey’s standing in the global economy. Thus, he believes that cutting the interest rate dramatically will give the economy the necessary impetus to spurn record growth.
The appointment of Çetinkaya (who has a low public profile) is seen as a compromise between Prime Minister Ahmet Davutolğu, Deputy Prime Minister Mehmet Şimşek, and President Erdoğan. However, whether the Central Bank will be able to maintain its aura of economic independence in an increasingly authoritarian Turkey is uncertain.
Çetinkaya’s Grit Will be Tested by the Palace
Markets have responded well to the appointment of Çetinkaya, with the Turkish Lira stabilising around 2.83 to the US dollar. As many economists expected, Çetinkaya’s first move as Central Bank Governor was to cut interest rates by sanctioning a 50-basis point cut in the overnight lending rate, leaving the top end of the interest rate corridor at 7.25-10%.
There has also been a drop in inflation to 7.5% due to growing international financial stability. While not a significant cut to the top end interest rate, many economists worry whether Çetinkaya will cut the interest rate further at the behest of those promoting the Palace’s economic ideas.
Çetinkaya’s appointment is seen as a continuation of Başçi’s unorthodox, but effective, policies. However, he is not as politically formidable as the former Central Bank governor. His lack of experience will have many wondering if he is up to the job. He has vowed to get inflation down to 5% by 2018 — a bold promise.
Erdoğan’s Economic Legitimacy Relies on Continued High Growth
The Turkish economy is in a very precarious position. In 2015, the economy grew by 4%, which is high relative to other emerging markets. Prevailing low oil prices and a significant number of refugees contributed to maintaining high levels of domestic consumption.
However, unemployment is around 10% and Turkey has a large current account deficit. Combining this with growing political insecurity and risk means that the Turkish economy will remain rather exposed to external shocks. This includes a flagging tourist industry which is suffering in 2016 due to a number of geostrategic fallouts and increased terrorist attacks.
While there is a push for structural reform of the economy, many investors are wary of investing in Turkey in light of lacking judicial independence and acquisition of private companies by the state. Continued, strong growth is essential for Erdoğan and the AKP to maintain economic legitimacy. Without a sustainable economic programme and reforms that can spur growth as well as increase investment, it may be impossible for the AKP to preserve its popular support and welfare programmes.
Çetinkaya has a tough job ahead of him, but he will have to prove his credibility by both maintaining a suitable monetary policy and by trying to reduce inflation without cutting rates too much. However, if Turkey’s increasingly authoritarian political culture starts to affect the independence of the Central Bank, this could spell major problems for the Turkish economy – and for Çetinkaya.