President Recep Tayyip Erdogan’s shocking decision to appoint a new central bank governor — the fourth in 20 months — has plunged Turkey’s ailing economy into deeper turmoil, marked simultaneously by high interest rates and a tumbling currency, at a time when the central bank’s foreign reserves are already in the red. How and why Erdogan made such a grave move akin to economic suicide remains open to debate, but a risky plan for snap elections might be underlying his calculus.
It was only in early November that Erdogan had replaced the central bank governor with a trusted member of his Justice and Development Party (AKP) — former Finance Minister Naci Agbal — in a bid to rein in the slump of the Turkish lira and curb dollarization. Agbal was well on course to restore some confidence in the markets when Erdogan sacked him with an overnight decree March 20, offering no explanation for the move.
Two days before, Agbal presided over a central bank decision to raise its policy rate by 200 basis points, the latest of several hikes during his term, which have brought the rate to 19% from 10.25%. The rate hikes helped the lira regain ground against the greenback and slow dollarization, but evidently, some AKP leaders and business groups close to the party were not happy with the higher interest rates.
Defying economic orthodoxy, Erdogan has argued that high-interest rates fuel inflation and has often put pressure on the central bank to keep the rates low. His interventions, which became bolder after he assumed sweeping executive powers in 2018, have contributed to the loss of confidence in Ankara’s economic management, which has led foreign investors to flee the country. The sacking of Agbal reignited the misgivings, sparking a fresh rush for dollars that caused the lira to slump to around 8 from 7.2 against the greenback. Why did Erdogan brave those obvious consequences? Was it another “work accident” of his one-man rule? Or was he misled in some palace intrigue involving his son-in-law Berat Albayrak, who resigned as treasury minister under controversial circumstances in November?