Given the continuing economic illiteracy of Turkish policy makers that has lead to the rapid erosion of of the currency and high -- and rising -- inflation this post from 2019 seems even more relevant today (24/11/2021)
Once again, a European-based Turkish
financial analyst Turkey shares hard-won insights into the current status of
the Turkish economy. Policy makers like the Central Bank governor, the Minister
of Finance and, of course, President Tayyip Erdoğan all seem caught wide-eyed in
the headlights of the oncoming recession. Whatever the cause – intra-party
feuding, personal ambition, long-held financial prejudices or simple
incompetence – the policy makers seem unable to develop a credible program to
reverse course. Our analyst sympathizes with those who struggle to understand
Turkish economic policy and proposes a unique place to begin the study. Because
he (or she) would like to continue to visit his (or her) homeland without fear
of instant jailing, he (or she) prefers to remain anonymous.
I get calls from economists,
investors and financial analysts around the world with the same problem. They
are all extremely well educated and have impressive professional resumes. Yet
they are all driven to frustration by the difficulty – the impossibility – of
trying to understand the twists and turns of Turkish economic policy. Help us
find a way through this maze of mis-information, constantly missed targets, and
general confusion they plead. I’m tempted to tell them to take two aspirin and
move onto another country. But duty calls. What I really should tell them is
that the secret to understanding current Turkish economic policy making lies
not with classical economic or financial theory. If they really want to
understand what is going on they should start with the unique structure of the
Turkish language itself. Seriously.
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| Turkish Finance Minister Albayrak pleading for help? |
One of the most difficult aspects of
the Turkish language is something called ‘the reported past tense’ – where the
root of the verb carries an ending -miş
or -mış. Which one you use depends on
something called ‘vowel harmony’, but that’s a subject for another day. The
important thing to remember is that when you hear either of these two endings
the speaker is referring to events that were reported to him. He didn’t
actually witness them himself. In this way the speaker is absolved of all
responsibility for the reported action. Take the verb gitmek - to go. The simple past tense is gitti – he, she, or it definitely ‘went’. However, when you say gitmiş
you make no claim to being definitive. Maybe he, she, or it went. Or maybe they
didn’t. You’re just reporting what someone said might have happened, i.e. don’t blame me if they didn’t actually go.
I think one of the most telling uses
of this ‘reported past tense’ is mış gibi
yapmak – roughly translated as ‘to
pretend as if’. But it goes beyond this simple translation to define
someone – or an organization – as ‘not
having the necessary skills/intention to perform their assigned function, but
rather pretending that they are performing just to fool others’. The
closest English concept is ‘ticking the
boxes, but the boxes are empty.’
Perhaps the most glaring example of mış gibi
yapmak is the Turkish Central Bank. The Central Bank, as sanctified in many
laws and regulations, is supposed to be independent and is supposed to pursue a
policy of price stability and ‘inflation targeting’. After decades of
ultra-high inflation Turkey, under the auspices of the IMF, moved to what is
called ‘implicit’ inflation targeting in 2002. A few years later it moved to
‘explicit’ inflation targeting, i.e. state a target and try to stick to it. Although
the country hit the 5% target only once the inflation fight was a relative
success for a few years as it at least remained in single digits – considered a
huge improvement. In 2016 the situation changed with the appointment of a new
Central Bank governor, Murat Çetinkaya. With President Tayyip Erdoğan demanding
high growth regardless of cost things got out of control with inflation now
running at 20% and threatening to go even higher. What went wrong? This is
where mış gibi yapmak comes in.
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| Turkey's Central Bank -- independent or a mere rubber stamp? |
In order to fulfil its stated
function the Central Bank needs three things: independence, fully flexible
exchange rate policy, and transparency/accountability in policy. In other
words, turn control of monetary policy over to capable technocrats who can
think beyond the next election. Protected – in theory – from political meddling
the technocrats should convince the public about their seriousness in
maintaining stability. And through the various reports they are required to
publish they are accountable to the general population/government/parliament.
In theory the Central Bank does all these. But, unfortunately, theory does not
live in today’s Turkey.
With the President facing a number
of critical elections and referendums he demanded easy money and high growth. Unwilling or
unable to resist this relentless pressure the Central Bank’s main policy since
2016 has been mış gibi yapmak. There
are eight regular Monetary Policy Committee meetings a year where decisions are
taken a simple majority rule. The MPC sets the inflation target and the governor
reports to the parliament and government. If the inflation target is not met
the Central Bank must publish an inflation report detailing the reasons for not
meeting the target every quarter.
All fine, except things get a little
cloudy in practice. It’s hard to maintain independence when, as widely
speculated, the Central Bank governor has to get approval from the Finance
Minister and President before every MPC meeting to hike rates. Given President
Erdoğan’s fervent ideological stance against interest rates in general it takes
a very strong Central Bank governor to go against that stance. And the current
governor has shown no indication of such strength. As a result, the Central
Bank has been able to hike rates only as a last resort when the currency was
crumbling daily. On top of this the Central Bank has using its rapidly
diminishing reserves to defend the currency and then trying to conceal the
extent of this move by borrowing US dollars from state-owned banks to maintain
the fiction of strong reserves.
But the Central Bank carries on as
if nothing has changed. It still publishes 100-page inflation reports, still
does fancy presentations talking about the global economic environment, how
they expect inflation to come down to 5% in the next 36 months, and how they
have a tight policy stance – despite the fact that banks are forced to keep
their deposit rates below the official rate. Despite all the verbiage and
well-drawn charts the reports give very little detail about exactly how all these lofty economic goals will
be attained – what concrete policy steps the Central Bank will take. In short, these reports are a victory of quantity over quality -- rather like the student who doesn't really know the answer but tries to fool the examiner by filling pages and pages with random information.
They may convince the only audience
that matters – the President -- but they’re not very good at convincing the
average Turkish citizen who is rushing to convert his Turkish Lira deposits
into hard currency. When the proverbial ‘Ayşe
Teyze’ – Auntie Ayşe – doesn’t trust her own currency good luck bringing
any foreign investors to Turkey.
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