Turkey’s central bank had 3 governors in 1.5 years - whose fault is it?

The Nov. 7 issue of the Official Gazette listed eighteen presidential decrees for removals from office and new appointments.

Bureaucracy was turned inside out at 03:00 a.m., as everybody slept in their beds. Dozens of high-ranking bureaucrats woke up to find out they had been cast aside, while many others were catapulted to offices they could never have dreamed of.

Under such circumstances, could one talk of stability and trust in an administration?

One of the 18 decrees removed Central Bank Governor Murat Uysal from his post, and replaced him with Presidential Strategy and Budgeting Chairman Naci Ağbal. İbrahim Şenel was in turn appointed to Ağbal’s former office.

Former Economy Minister and the ruling Justice and Development Party’s (AKP) Izmir mayoral candidate in last year’s elections, Nihat Zeybekçi, was appointed to the Presidential Economy Policies Council.

Uysal had been appointed as governor on July 9 last year, and had only spent 16 months out of his five-year mandate in office when he was removed. Looking from the Islamic point of view that Turkish President Recep Tayyip Erdoğan frequently emphasises with his desire for pious generations and “loving the created because of the creator,” Uysal had taken his seat at the Central Bank at the expense of another. Murat Çetinkaya was governor when Uysal was his deputy, and he was removed by Erdoğan before his term was up for not listening to orders and not lowering interest rates.

So, Uysal knew what the president demanded of him before he took office: To lower interest rates at whatever cost, whether it corresponds to what the economy needs or not!

His first act was to gather the Monetary Policy Committee (PPK) and lower the policy interest by 425 base points (4.25) at once. He later continued the reductions and lowered the Central Bank policy interest from 24 percent to 8.25 percent. Whatever he did, he could not bring to life the president’s famous thesis, i.e. his theory that inflation will fall as interests fall, interest rates are the cause and inflation the effect, low interests bring down inflation and cheapen credits, increase investment, grow the economy.

Although interest rates are in the single-digits, inflation still continues to rise. Low interest rates have sent currency exchange rates soaring. When Uysal was appointed, the U.S. dollar traded at 5.70 liras, and on the day he was removed, it stood at 8.55 liras, breaking several records back to back. As the lira lost 42 percent of its value, Turkey spent foreign currency reserves from the Central Bank and public banks to suppress the exchange rate hike, to the tune of $120 billion.

The Central Bank has no foreign currency left. Its reserves are in the negative. So, Murat Uysal was forced to increase policy interest rates by 200 base points in September, despite his mission to lower them. As back corridor rumours go, this move led him to receive a mouthful from the president, and he was unable to raise the rates further in October despite the markets expecting him to do so. He instead indirectly increased interest rates for other funding mechanisms, leading many to criticise him.

Currently the policy interest rate is 10.25 percent, but the interest rates for indirect funding mechanisms that the Central Bank has de facto put in practice have grown closer to 15 percent. Still, the lira continues to melt away and foreign currencies continue their extraordinary hike. Rumour has it that Murat Uysal was planning to hold Nov. 19’s PPK meeting closer, and to increase policy interest by at least 200 to 400 base points. Apparently, Uysal tried to get the Palace to approve this move, but was turned down.

With this rejection, he shared the same fate as Çetinkaya, and was replaced with a midnight decree.

Since July 2018, when Turkey implemented the one-man regime that is the Executive Presidential Government System (CHS), President Erdoğan removed two Central Bank governors from office and appointed a third. He has been criticised for arguably violating the law on the central bank, which stipulates the appointment of a governor for at least five years, and that the central bank remains independent to fulfil its primary duty of price stability.

Naci Ağbal, Uysal’s replacement, is a finance man who has no experience in central bank management. He has served as AKP deputy, parliamentary group deputy, deputy chairman for the AKP, and finance minister in some AKP governments.

He did not run for parliament in the 2018 elections, and with the shift into CHS, was appointed to the Presidential Strategy and Budget Directorate (CSBB). Under his leadership, the CSBB prepared three New Economic Programmes (YEP) together with the Finance Ministry, three Mid-length Monetary Plans and two budgets – none of which achieved any of the goals, predictions or plannings. All foresight on inflation, foreign currency rates, growth, budget spending and budget deficit collapsed within a few months, becoming meaningless.

So, Naci Ağbal’s appointment as the Central Bank Governor is a sign that the last remnants of the Central Bank’s already-battered independence have been removed, and the era of a partisan Central Bank governor has begun.

The Central Bank had managed to remain relatively outside of the party-state and partisan cadres, thanks to its own special legislation. From now on, its institutional structure can also be AKP-ified.

After Murat Uysal, who could only hold on to his seat for 16 months even though he did everything that was asked of him, the seat of the Central Bank Governor has now become completely politicised.

There are some who say Ağbal coming from finance bureaucracy would lend him more weight, and that he could resist some demands by Erdoğan and his son-in-law and finance minister Berat Albaayrak to implement smarter monetary policies in the Central Bank – but this is not realistic. On the contrary, it would be realistic to expect Ağbal to act like any old Erdoğan bureaucrat, to follow his commands to a T, and to hand the keys of the Central Bank vaults over to the president completely.

This appointment has revealed another concrete fact: That Erdoğan and the AKP are now having trouble coming up with people to place in key and critical positions. Appointing Nihat Zeybekçi to the Economy Policies Council, Ağbal to the Central Bank shows that the government is running out of cadres with all the people who were dismissed, disappointed, discarded or distanced from the AKP.

Whose fault could it be when a government removes two Central Bank governors in 1.5 years and appoints a third one, if it issues 18 decrees to shift appointments/dismissals in one night?

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.