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Central Bank governor's sacking creates turmoil in Turkish financial markets




Şahap Kavcıoğlu, the new governor of the Turkish Central Bank, is in tune with RecepTayyip Erdogan (photo: TCMB)
Şahap Kavcıoğlu, the new governor of the Turkish Central Bank, is in tune with RecepTayyip Erdogan (photo: TCMB)
TURKEY. The price of the Turkish lira suffered a sharp depreciation in the foreign exchange market on Monday, March 22, 2021. The 14.8% drop in the currency against the dollar, the largest in nearly three years, led to the momentary interruption of trading on the Istanbul Stock Exchange, twice, after its main index fell by nearly nine points.

The epicenter of the earthquake was the dismissal of the governor of the Central Bank by presidential decree in the early hours of Saturday, March 19, 2021. Naci Agbal, former finance minister (2015 to 2018), had been appointed less than five months ago by Recep Tayyip Erdogan to replace Berat Albayrak, the Turkish president's son-in-law, who will resign in November 2020. His predecessor, Murat Cetinkaya, had also been dismissed for refusing to lower interest rates.

The reasons for the executive's haste are to be found in the central bank's sharp increase (+200 basis points) in the main key interest rate to fight inflation. This measure, decided by Naci Agbal on Thursday 17 March 2021, has displeased Recep Tayyip Erdogan. The Turkish president has always counted on strong growth fuelled by cheap credit, and therefore refused high interest rates.

During his short term in office, Naci Agbal, a defender of the central bank's independence from the government, raised the key rate from 10.25% to 19%, including the latest decision. This had allowed the lira to gain more than 3% against the dollar since the 200 point rise on Thursday 17 March 2021. The Turkish currency closed at 7.2185 to the dollar on Friday, March 18, 2021. Since then, the exchange rate has risen to 1 Turkish lira for 8.47 dollars on Monday morning and stabilized around 7.90 in the afternoon.

 

Economist, former AKP deputy, to replace Naci Agbal

If the president did not express himself on this dismissal, Nurettin Canikli, number two of the AKP (Justice and Development Party - ruling party founded by Erdogan), took care of it for him. Via several tweets, on Monday 22 March 2021, he accused the governor of the Central Bank of not having fulfilled "his main task (...) that of ensuring price stability."

On the same day, in the face of the plummeting pound, Lüfti Elvan issued a statement saying, "we will not make any concessions regarding the free market mechanism and will maintain a free exchange rate regime." The Turkish Finance Minister said, "We will maintain our economic policy until we achieve a sustainable decline in the inflation rate." Lüfti Elvan counts on the economic reforms announced on March 12, 2021. "Our reform program will strengthen our structural foundations as well as our resilience against possible shocks," he assured.

Naci Agbal's successor, economist Şahap Kavcıoğlu immediately warned on Sunday, March 21, 2021, that he would follow the guideline set by the government. "According to the former AKP deputy (2015-2018), "lowering inflation will positively affect macroeconomic stability through risk reduction and permanent improvement in financing costs." According to him, it will lead to an increase in investment, production, exports and employment. The new Governor of the Central Bank intends to keep the monetary policy meetings at a monthly pace. Therefore, it will probably be necessary to wait for the next one, scheduled for 15 April 2021, for the likely announcement of a rate cut.

The Turkish Statistical Institute (TUIK) published the unemployment rate for 2020 on Monday 22 March 2021. It stands at 13.2% (-0.5% compared to 2019), or 4 million unemployed (-470,000). At the end of February 2021, inflation stood at 15.6% annualized.

 

Marie-Cécile Audibert


Monday, March 22nd 2021



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