Turkey and Its Central Bank: Turning Heads

When the Turkish government in mid-October removed three members of the Monetary Policy Committee (MPC), the reaction was somewhat predictable. After all, the writing had been on the wall. But what difference does it make to Turkish monetary policy?

Recep Tayyip Erdogan, the all-powerful Turkish president, on Thursday, October 14, ousted three key members of the central policy-making committee. Two of the three were deputy governors, Semih Tumen and Ugur Namik Kucuk. The third, Abdullah Yavas, was the longest serving member on the Monetary Policy Committee (MPC) of the Turkish Central Bank (TCMB).

Following the removal of the three, the lira fell against the major trading currencies. It has since reached a level of about 9.30 to the dollar, a record low for the currency of Turkey. Naturally, this will make products made in Turkey and holidays on the Mediterranean cheaper for buyers from other currency regions. The flipside of the coin is the increase in the price of foreign goods – and that includes anything Turkish companies need to make their end-products.

Attracting Tourists Through Lower Prices

The pandemic has left a gaping hole in the Turkish economy due to several separate reasons. Perhaps the most important one was the collapse of tourism. With a fall in the lira, Turkey will boost its allure to tourists, especially from Europe and Russia, who have an additional incentive of choosing Turkey over rival destinations such as Greece, which uses the euro.

The president and his AK Party are preparing the ground for the next elections, due in 2023. The surprise victory of Ekrem Imamoglu of the CHP over his AKP rival, Binali Yildirim, in the 2019 Istanbul mayoral elections has highlighted the potential hazards of the coming elections.

Erdogan and his team are making conscious decisions about economic policy. That includes rate cuts when inflation tends to rise and the hiring-and-firing of central bankers – Erdogan got rid of three central bank governors in a little over two years. He is evidently not impressed about the concept of central bank independence and has moved to do to the monetary policy authorities what the government has done to other institutions as well, namely to toe the line.

Loss of Experts May Come Back to Haunt the Country

Erdogan seems adamant that he and his team are  better equipped to run the central bank’s business than the orthodox monetary policy experts who held sway over the TCMB for almost two decades. And, obviously, if you are going to run the central bank from the offices of the government, you don’t need much of an independent MPC either.

Still, the question is what it does to staff morale at the bank. The TCMB has already lost many of its experts to jobs abroad and the latest developments may lead to further departures of key staff in the back offices. The government seems unfazed and it didn’t provide a reason for releasing the three MPC experts. But for the sake of international cooperation and investor confidence, the loss of such talent is not a good sign.

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