If Turkey’s biggest economic challenges are chronic inflation and a plunging lira, then its new central banker Sahap Kavcioglu has unorthodox ideas on how to tackle them.
Kavcioglu, a little-known professor of banking who wrote a book about interest-free finance, has penned newspaper columns arguing that high interest rates drive inflation, a view at odds with mainstream economic theory but in tune with Turkey’s powerful president, Recep Tayyip Erdogan, who has called interest “the mother of all evil”.
“Mr Kavcioglu will strongly echo what has already been expressed by President Erdogan. This was the reason why he was appointed,” said Ibrahim Turhan, a former deputy central bank governor who is now an economics professor at Istinye University. Turhan served alongside Kavcioglu in parliament when both men were elected for Erdogan’s ruling Justice and Development party in 2015.
Kavcioglu’s appointment is the latest act in a tumultuous political drama over the best way to manage the Turkish economy. He replaces Naci Agbal, a respected former finance minister brought in after his own predecessor was fired as the lira plunged.
Agbal promised to keep monetary policy tight, helping the lira recover, but he was this weekend sacked by presidential decree after he lifted rates to 19 per cent last Thursday in an effort to tame inflation running at almost 16 per cent.
Even as Kavcioglu sought to reassure investors he would fight inflation and signalled he would not immediately undo Agbal’s rate hikes, the lira has plunged 14 per cent.
The central bank shake-up comes at a challenging time for emerging markets, which are competing for investor interest with rising US Treasury yields. Turkey, whose currency lost a fifth of its value last year and faces short-term debt obligations of about $180bn, is seen as especially vulnerable.
When Kavcioglu said he would do whatever was necessary to ensure inflation’s decline, “it doesn’t necessarily mean generally accepted monetary policy, but that he will cut inflation by cutting rates”, said Turhan. “He will try to increase the available borrowing facilities for corporates at a lower cost. He will try to do this because he thinks the impact will help to curb inflation.”
Economists say the simplest way to soothe the currency and get double-digit inflation under control would be to raise interest rates — thus keeping prices of imported goods in check.
The new central bank governor has a low profile in Turkey. The 53-year-old took up a teaching post last year at Istanbul’s Marmara University, where he had earlier earned graduate degrees from its banking and insurance programme, according to his LinkedIn page.
Before his single term as a lawmaker, he worked at commercial and state banks, including a decade at Halkbank, a state lender that has been indicted in US federal court on money-laundering, fraud and sanctions offences. Kavcioglu has not been implicated in the alleged scheme. Halkbank has denied wrongdoing ahead of a trial that is expected to begin this spring.
Clues as to Kavcioglu’s thinking can be found in his newspaper columns. Kavcioglu criticised rate hikes totalling 875 basis points under Agbal. In a column on February 9, he argued high rates merely attracted portfolio inflows when Turkey needed investment in production. “It is always our country that loses from the policy of high interest and low exchange rates,” he wrote. “Increases in the interest rate paves the way for inflation.”
Kavcioglu also defended a policy attributed to Berat Albayrak, a former finance minister and Erdogan’s son-in-law, of spending the central bank’s foreign currency reserves to slow the slide in the lira last year, draining an estimated $100bn. “If reserves aren’t used when they are needed, when will they be used?” he wrote on March 2.
Kavcioglu’s appointment is evidence that Albayrak “is still pulling the strings”, said Wolfango Piccoli, co-president of the consultancy Teneo Intelligence. Turkish media reported the two men shared a thesis adviser, Erisah Arican, whom Erdogan recently named chair of the Turkish Wealth Fund. “The concern about Albayrak coming back, formally or informally, is that it would be a return to his model of growth that’s unsustainable, based on cheap loans,” said Piccoli.
“It doesn’t matter who’s the next governor when institutions have become empty shells devoid of autonomy and independence and are there for the whims of the president,” he added.
Erdogan last month lashed out at opposition demands for a judicial probe into how the reserves were spent under Albayrak, cursing his opponents by saying, “May a stone as large as [my] son-in-law fall upon your heads.”
Opposition politicians were among those who slammed Kavcioglu’s appointment. Faik Oztrak, a former Treasury undersecretary who is now a lawmaker with the Republican People’s party, told reporters on Monday that “Erdogan’s curse has come true . . . The curse from today is may Erdogan be the central bank governor.”