Eurasia Group predicts Erdoğan may be moving to capital controls after Ağbal’s firing

Turkey’s President Recep Tayyip Erdogan’s firing of Central Bank Governor Naci Ağbal has dimmed hopes for real economic reforms and undermining his own stated intent to pursue them. 

Ağbal’s sacking came as a shock to investors and observers of Turkey’s economy because no one saw the move coming. His initial appointment last November was cautiously welcomed because it marked a departure from the unorthodox economic thinking that was adamantly opposed to raising interest rates to combat inflation. 

However, in this adherence to economic orthodoxy lay the seeds of Ağbal’s departure. Faced with a nearly 15 percent inflation rate, Ağbal raised interest rates by a cumulative 875 basis points since his appointment. Only days before his firing, he increased it by 200 more in a move praised by investors as necessary to protect the Turkish lira from further depreciation. 

President Erdogan personally believes that high interest rates are a cause of inflation rather than the inverse which is the view of the majority of economists globally. His neutering of the Central Bank’s independence was designed to limit its capacity to raise rates in line with these views. 

Ağbal’s replacement is a little known former member of the ruling Justice & Development Party (AKP) named Sahap Kavcıoğlu. Governors of the Central Bank are usually meant to serve four year terms in their position, but Kavcıoğlu is the fourth Central Bank Governor to assume the role since 2019.

In a research note from the geopolitical risk consultancy Eurasia Group, it was warned that Kavcıoğlu’s appointment was an ominous sign of a more chaotic policymaking process. Eurasia Group contends that this will neither alleviate pain in the Turkish economy or spare Erdogan from his declining popularity. 

“President Recep Tayyip Erdogan’s abrupt firing of central bank Governor Naci Ağbal marks a return to unorthodox policies that will fuel uncertainties, destroy investor confidence and ultimately trigger capital controls,” read the note. 

Shortly after becoming the bank’s Governor, Kavcıoğlu said that he would use every measure possible to curb inflation, but he himself shares Erdoğan’s view on interest rates. 

Eurasia Group assessed that Ağbal would inevitably run afoul of the president, but they noted that this conflict came sooner than expected. The consultancy group further posits that “Turkey is now in a worse spot than on November 7...” the day Ağbal was selected to lead the bank. 

It is too soon to see how markets have reacted to Ağbal’s firing, but the Turkish lira was already being traded at a rate of 8.3575 to the dollar when markets in Asia began opening on Monday.  This represents a depreciation close to 13 percent, well within the range expected by analysts in response to Erdogan’s decision. 



Early trading is usually considered thin which can exaggerate impacts. However, few financial institutions are betting that Kavcıoğlu will buck Erdogan and continue the hawkish path set by Ağbal. 

Eurasia Group and other analysts predict that the Turkish government will likely intervene heavily in currency markets to prevent large capital outflows from occurring. It has periodically resorted to this tact when the lira was suffering from volatility.

If there is a return to the stubborn belief in interest rates, it would run the risk of overheating the economy and put it further down the route towards a balance of payments crisis. Selva Demiralp, director of the Koc University-TUSIAD Economic Research Forum in Istanbul suggests that the risk of backfiring is sharp. 

“Such a priority has a high potential to backfire by causing extreme pressures on the lira and contracting the economy even further,” she said to The Guardian.

Economic turmoil is coinciding with a tense domestic political background. Only a day after Ağbal was fired by Erdogan, he issued a decree withdrawing Turkey from the Council of Europe’s Istanbul Convention, a treaty designed to combat violence against women. This prompted large protests on Saturday for Turkish women’s rights and statements of disappointment from world leaders including United States President Joe Biden

This week Turkish prosecutors filed an indictment with Turkey’s Constitutional Court to shutdown the pro-Kurdish People’s Democratic Party (HDP), the second largest opposition party in the country. The Turkish parliament also stripped HDP member Ömer Faruk Gergerlioğlu of his immunity over a tweet he wrote in 2016. 

Both Gergerlioğlu and his party stand accused of being supporters of the Kurdistan Workers Party (PKK), a terrorist group that has waged an armed insurgency against Turkey since 1984. It is widely believed Erdogan and his coalition are concerned about their ability to build a government if new elections were held before 2023 when they are next scheduled. 

Taken together, a feverish economy and a volatile political situation amid an ongoing pandemic, there is concern that Turkish policy making will grow only more erratic, the Eurasia Group assessed. All of this does not bode well for either tackling Turkey’s rising inflation or deeper structural problems in the economy. 


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