Turkish fairy tales of reform in economy

In a country, where a deputy is ripped off his political immunity because of a tweet he has reposted from a news site, and where a political party which has received more than 6 million votes is prosecuted so that it can be closed; the economy management is left with only one tool of raising interest rates.

The Central Bank (CB), which has been gaining time with forward guidance for a couple of months, eventually raised interest rates by 2 points. The expectation in financial markets was that it would raise interest rates by 1 point.

So why did this happen?

CB Governor Naci Ağbal increased interest rates from 10.25 percent to 15 percent on November 20 as soon as he took office. His latest interest rate increase by 2 points was on December 25.

For two and a half months since the end of December, despite the high inflation momentum, he has not raised interest rates and tried to manage the situation through forward guidance.

At the Monetary Policy Committee meeting on March 18, he raised rates by 2 points, in a bigger than expected hike; but actually he made up for the previous fall behind.

Ağbal’s latest communication move was to publish a blog post on the Central Bank's website. He wrote, “Confidence is also of great importance for central banks, which are one of the main institutions of economic management. When monetary policy is trusted, it becomes more effective, increasing the power to improve expectations. In this context, the first step a central bank must take to achieve its goal is to ensure that economic actors have confidence in monetary policy. A central bank that successfully fulfills its mandate opens the door to a stable and productive economy. In short, a reassuring monetary policy focused on price stability is one of the keys to social well-being in the long run.”

One wonders why Ağbal waited for two and a half months. He did so, indeed, so that the Presidential palace in Beştepe, Ankara, would announce the promised reforms. Ağbal gained time through forward guidance.

The announcement of reforms took more time than expected. They were not announced until the exchange rate started moving upward. The reason for this upward action was first due to President Erdoğan’s comments at the ruling party’s İzmir Convention. His words were about the reestablishment of the honor of his son-in-law, former Treasury and Finance Minister Berat Albayrak. This created a tension with the thought of “Is he coming back?” Then, the exchange rate moved upward again due to the rise of bond interest rates triggered by inflation concerns in the United States. The exchange rate increased 7-8 percent in a very short time.

As the exchange rate was rising, it must have occurred to the government that at that time when the exchange rate peaked at the beginning of November last year, they had announced that law and economy reforms were coming, which brought the exchange rates down.   The idea of using the same tool must have come to their minds. In fact, the fall in the exchange rate at that time was due to the dismissal of the Finance Minister and the Governor of the Central Bank. Other new appointments and an increase in the interest rate were also effective.

This time, again, Ankara immediately embraced the rhetoric of reform. On March 2, the “Human Rights Action Plan” was announced as a “legal reform” which was mostly copy and paste. On March 11, “economic reforms” were announced.

But the texts of the reforms were obviously prepared in a hurry. So much so that it was not even indicated which articles written as reforms would be carried out by which institutions and when. When this was pointed out, minister Lütfi Elvan announced that they would be ready by Tuesday (March 23). The English text was not presented because it was not ready. Elvan said this was asked a lot because people were curious. (Isn't it just natural when you make a 98-page document out of a maximum 15-page text and publish it only in Turkish, without an English text, that people would be asking questions?)

What is expected from these reform packages must be this: These announcements would facilitate the work of economic policy executives if the public is convinced by the promises of reforms.

Both packages are empty, and their promises have no effect because in practice just the opposite is done. It seems that Ağbal is aware of this and he has decided to raise interest rates.

This actually seems to be a decision taken before it became too late, given the negative trajectory for developing countries in current global conditions.

If the packages announced in Turkey had the effect of creating confidence, then the preferences of citizens to hold foreign currency deposits and keep gold could have changed in favor of the Turkish Lira.

Ağbal also can easily see this situation. The 2-point interest rate decision is also a sign that no benefit is expected from the announcement of reforms in the field of reverse dollarization. So, the message somewhat has a tone of “This has fallen to our lot.”

Unfortunately, this cycle will just repeat.

This has happened because a negative real interest rate environment was created by the Central Bank while banks were forced to lend by the Banking Regulation and Supervision Agency (BDDK), generating a gigantic credit growth. This created the suitable environment to exit from TL and it eroded foreign currency reserves. At the end of the day, you run on empty with only one instrument left. Foreign currency is not arriving, so you have to raise the interest rate.

Another factor is the political atmosphere. You govern with an oppressive autocratic style and the judiciary is very much influenced by political instructions; but then, you try to convince your citizens to stop investing in other country’s currencies.

In a country, where a deputy is ripped off his political immunity because of a tweet he has reposted from a news site, and where a political party which has received more than 6 million votes is prosecuted so that it can be closed; the economy management is left with only one tool of raising interest rates.

Unfortunately, an interest rate hike alone does not help in this. If you make the interest rates 25 percent, would that create a return to the TL? My answer is no.

Economy runs within the path that reflects politics. As politics sinks into the whirlpool of autocracy, the economy will continue to slip at the same place with exchange rate fluctuations and sharp rate increases. The cost of all this will be paid by millions who are out of their jobs and impoverished.


I wrote the above after the Central Bank raised interest rates by 2 points. Then, in a pro-government newspaper, a headline read “Who did you make this operation for,” directly targeting Central Bank Governor Naci Ağbal. Next day, Ağbal was removed from his post by President Erdoğan. The new appointed CB Governor is a former AKP deputy, Şahap Kavcıoğlu.

Kavcıoğlu is an expert writer of the newspaper that had the above headline. In his article dated February 9, he wrote, “The Central Bank should not be insistent on high interest rate policy. While interest rates in the world are near zero, increasing rates in our country will not solve economic problems. On the contrary, it would deepen the issues in the future. This is because interest rate increases will indirectly cause increases in the inflation rate.”

We will see whether or not Kavcıoğlu will withdraw this increase of 2 points in interest rates done by Ağbal. However, it is pretty clear that economic and financial markets will be very active hectic next this week and the lira will continue to lose value.

Unfortunately, the policy Ağbal adopted seeing the seriousness of the situation was swept down the drain in a short time.

Erdoğan is proceeding by grinding the few competent technocrats around him, creating new whirlpools for crises in the economy. Most probably, his concern to recover the economy until 2023 has reached an unprecedented level of anxiety.

As politics navigates on the autocratic road, it has a route that creates its own crises.

September 10, 2021 Central Bank's Beştepe problem