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Destruction of the Turkish Central Bank’s independence explained

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Turhan Bozkurt

The Central Bank of Turkey (TCMB) started losing its independence after Durmuş Yılmaz left the post of governor in 2010. Yılmaz, who now manages economic policy for the Good Party (IYI), pursued an independent monetary policy despite the demands of then-Prime Minister Recep Tayyip Erdoğan.

Justice and Development Party (AKP) leader and President Erdoğan in 2015 appointed Murat Cetinkaya, a close friend of his son Bilal Erdogan, as governor of the central bank.

The appointment was widely discussed in Turkey because Cetinkaya was not a graduate of any economics department. Having a degree in international relations from Boğaziçi University, Çetinkaya should not even have been a vice governor according to the Central Bank Law. Thus, the bank became open to political intervention when he was appointed governor.

The crisis of Andrew Brunson, an American pastor whose imprisonment on terror charges resulted in sanctions imposed by the US administration on the Turkish economy in August 2018, came in the midst of Erdoğan’s celebration of his victory in the presidential election on June 24. The sanctions prompted the US dollar to gain 35 percent in value against the Turkish lira in the space of a month. After the markets closed, the central bank increased interest rates from 11.25 percent to 24 percent, despite Erdoğan’s negative attitude towards high interest rates. Çetinkaya’s decision was in direct contradiction of Erdogan’s view that a decrease in interest rates results in a decrease in inflation.

At the time Erdoğan seemingly buried the ax since the dollar fell from 7.24 lira to below 6 lira thanks to the increase in interest rates. However, on July 6, 2019 Erdoğan put an end to the independence of the bank and ousted Çetinkaya, saying, “We dismissed Çetinkaya as he was not obeying us and did not lower interest rates.”

In fact, according to the Central Bank Law, governors do not cease carrying out their duties unless they die in office or resign. Despite this, Çetinkaya was dismissed before his term in office expired.

Murat Uysal, a close friend of Erdogan’s son-in-law and Economy Minister Berat Albayrak, was appointed to replace Çetinkaya. According to alleged e-mails from Albayrak in the Panama Papers, documents leaked in April 2016 that detail financial and attorney–client information about wealthy individuals and public officials, Albayrak had previously requested that Çetinkaya employ Uysal at the bank.

As soon as Uysal took office, he obeyed Erdoğan’s “lower interest rates” orders and initiated a rate cut. Within a few months he had reduced the weekly repo (policy) rate from 24 percent to 8.25 percent.

After Erdoğan appointed a person close to him and his son-in-law Albayrak as governor, he took further steps to establish a “fully dependent TCMB.” A bylaw from 2014 that regulated internal appointments and promotions at the central bank was repealed on January 12, 2019.

As a result there were no more criteria to consider in any appointments or promotions of staff under the bank’s vice governors. Thanks to the abolition of the regulation, Erdoğan can now order promotions and relocations as he pleases without the taking into consideration factors such as age, university major, relevant experience or examination results.

Further, with another regulation dated July 11, 2020, a clause regulating the appointment of vice governors was removed. The clause required “10 years of employment [at the bank] or five years of employment with the president’s endorsement” in order to be appointed a vice governor of the bank. Now, there are no criteria for such an appointment.

With another change in the regulation, an obligation to allocate 20 percent of the annual central bank profit as “reserve fund [reserve capital]” was lifted, paving the way for this profit to immediately be transferred to the Treasury. In this way, Erdoğan also took control of the bank’s financial resources.

Since May 17, 2020, the criteria for being a member of the central bank board of directors have been relaxed. Elif Haykır Hobikoğlu, the daughter of Mustafa Haykır from Erdoğan’s ally the Nationalist Movement Party (MHP), was the first person to be appointed to the board after the easing of the criteria. Prof. Dr. Nurullah Genç, deputy chairman of the board, has neither banking nor central bank experience. Nevertheless, Genç holds the second most critical seat at the bank because he is loyal to Erdoğan.

Upon instructions from Erdoğan, critical parts of the TCMB were moved from Ankara to Istanbul, contrary to the law.

Erdogan’s next goal will be to facilitate an increase in the printing of currency. TCMB Chief Economist Prof. Dr. Hakan Kara was dismissed for his objections to such political intervention.

Central bank had gained complete independence thanks to IMF

After the 2001 financial crisis in Turkey, the central bank started operating according to International Monetary Fund (IMF) principles, and the government’s intervention was reduced to a minimum.

The bank has lost its independence with amendments to the law, dismissals in contravention of the law and appointments of officials loyal to Erdoğan. The Turkish lira has the highest loss in value among developing markets. Since the beginning of the year the lira has lost nearly 30 percent of its value against the US dollar.

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