Sacking of Turkey’s central bank chief could be harbinger of early elections
The decision by Turkish President Recep Tayyip Erdoğan to fire the central bank governor breaks the government’s own rules, points to higher inflation and could be the harbinger of early presidential and parliamentary elections.
The way Murat Çetinkaya was removed could be against the law. The presidential decree attempted to provide a legal basis for the decision, but though its justifications conform to regulations for other senior bureaucrats, it is uncertain whether they can be used for sacking a central bank governor.
Article 27 of the Law on the Central Bank of the Republic of Turkey says that the governor is not allowed “to engage in trade, nor shall he/she become a shareholder in banks or companies”. Duties in charitable associations and in foundations with charitable, social and educational purposes and partnership in non-profit cooperative companies are excluded from this provision. The following article says that the governor “may be excused from duty through the same procedure applied for his/her appointment, only when the prohibitions stated in Article 27 are violated.”
Therefore, the law clearly shows that the governor of the bank has a special status compared other senior bureaucrats working in other public institutions. But the new presidential system of government allows for the bending of such laws. I am not sure what the result would be if the decision were challenged by an administrative complaint filed to the Council of State, but it would be good to see what the courts would say.
But the removal of Çetinkaya has implications beyond the rule of law, as the independence of the central bank is essential for the effective functioning of the economy.
This is an important issue, as many in Turkey do not understand the relation between inflation and the independence of the central bank. There is a strong causality between the two - the rate of inflation is lower in countries where the independence of the central bank is assured.
All of Turkey’s institutions have been weakening and it seems, after a period of resistance, the central bank has joined them. It is now impossible for global markets to have confidence in Turkey’s already ailing economy.
There are also political implications. The government’s intervention has political aims as well as economic ones. It is a myopic intervention in which the government prioritised short-term gains over medium-term losses.
In Turkey, politicians always aim to lower unemployment in the short run, but see low inflation and efficiency as medium-term targets. But in this case it is questionable whether pressuring the central bank to lower interest rates - the reason Erdoğan removed Çetinkaya - will boost employment in the short run.
Politicians believe voters see the real effects of inflation only in the medium run, but believe it is more difficult to conceal the effects of unemployment. So what does Erdoğan plan to gain politically?
If he intends to lower unemployment in the short run by stimulating investment at the expense of the depreciation of the lira and higher inflation in the medium term, then this means Turkey will shortly find itself heading to new presidential and parliamentary elections.
Can lower interest rates encourage investment in Turkey? I am not sure, because investment decisions are now generally shaped by expectations and Turkey’s backsliding in ensuring the rule of law. But low interest rates can invigorate the construction industry and Erdoğan may be aiming to put that at the centre of his growth policy.
This makes early elections more likely, as Erdoğan cannot risk waiting for the next scheduled elections in 2023 when the negative medium-term affects of this loose monetary policy will be visible. He will want to direct the country towards elections during of higher employment due to expansion in the construction sector prompted by pressuring interest rates.
If that is not Erdoğan’s plan, then Turkey will find itself in an even more complicated situation in 2023.