Turkish President Tayyip Erdoğan on January 15 2021. Picture: PRESIDENTIAL PRESS OFFICE/VIA REUTERS
Turkish President Tayyip Erdoğan on January 15 2021. Picture: PRESIDENTIAL PRESS OFFICE/VIA REUTERS

Politics drove Turkish President Tayyip Erdogan’s sacking of central bank chief Naci Agbal after just four months in office, according to six informed sources. One said the big interest-rate hike two days earlier was “the last straw”.

Agbal’s shock dismissal by Erdogan, who dislikes orthodox monetary policy, pushed Turkey to the cusp of another currency crisis.

The decision surprised the governor, who according to two of the sources worked late at the bank on Friday March 19, hours before he was fired.

Government and central bank officials said Agbal’s rapid rise and fall reflected  his divergent vision for the economy and the perceived threat he posed to Erdogan’s son-in-law and former finance minister Berat Albayrak.

The presidential palace and central bank declined to comment on Agbal’s departure, as did representatives for Agbal and Albayrak.

Three of the sources, who spoke on condition of anonymity, said Erdogan was irritated in February by Agbal’s decision to review a costly policy undertaken during Albayrak’s tenure of selling dollars — roughly $130bn since 2019 — to defend the lira.

“Was there discomfort regarding this? Yes, there was. It was one of the influential issues in the presidential palace,” the first source said.

Another person with direct knowledge of the review of FX sales said it could have turned into an outside investigation had Agbal remained at the bank.

Word of the potentially sensitive review reached Erdogan at about the time he was rallying public support for Albayrak, fuelling speculation that his son-in-law was seeking a return to government after having quit in November, a day after Agbal’s appointment.

Albayrak and Agbal are seen as representing two key factions of the AK Party (AKP), which has ruled Turkey for two decades under what analysts describe as an increasingly authoritative and impulsive Erdogan.

‘First shadow’

One of the sources said “the first shadow fell over” Agbal on February 24 when the bank made an apparently routine adjustment to reserve requirements that was interpreted by Erdogan as a veiled interest rate hike.

The same day, the president told AKP members that FX reserves at the central bank had been reduced on Albayrak’s watch to help the economy through the pandemic last year.

The $130bn in sales by state banks were backed by central bank swaps, and they cut net FX reserves — a country’s buffer against financial crisis — by about 75%.

Even as several top government and party officials lined up to publicly defend Albayrak from opposition criticism, Agbal — himself a former finance minister — did not comment on his legacy and promised to rebuild the reserves.

“Agbal was not happy that his job was being overshadowed by the previous policy of spending FX reserves,” said a person close to the bank.

During Agbal’s short tenure, the lira first rallied 24% from a record low before beginning to slide when Erdogan began defending Albayrak’s legacy. It jumped nearly 4% after Agbal hiked rates by two percentage points on March 18 before plunging 13% when he was fired two days later, returning nearly to where it began.

Cemil Ertem, Erdogan’s chief economics adviser, said Turkey will not adopt capital controls to support the lira, adding “the free market economy will be applied without compromise” despite the leadership overhaul.

Agbal had won praise from foreign investors who found his approach to monetary policy reassuring after years of worry about the central bank’s credibility — now in tatters again after he became the third governor to be ousted in two years.

Erdogan, who also abruptly fired the last two governors in part over policy differences, had promised when Agbal was appointed to get economic reforms going.

Negative Feedback

As Agbal’s successor, Erdogan named Sahap Kavcioglu, a former banker and AKP lawmaker who pledged to keep policy tight but has previously espoused the unorthodox view shared by the president that high interest rates cause inflation.

Some investors now say they will avoid Turkey as long as Erdogan is leader. Ratings agencies have warned of downgrades while stocks have suffered their worst sell-off since the 2008 global financial crisis.

“Erdogan, and the Turkish conservative circle, feel that a tight monetary policy goes counter to their interests,” said Patrick Esteruelas, research head at Emso Asset Management in New York.

In March, with inflation above 15% and the lira sliding amid a global bond market rout, markets were betting on a 1 percentage point rate rise to 18%.

Faced with what analysts called a credibility test, Agbal — who had already hiked rates from 10.25% — decided to go further, to 19%, to reinforce his inflation-fighting rhetoric.

Before that, as usual, he informed Erdogan’s office of the policy decision. Two of the sources with knowledge of the bank’s operations said there was no response.

“There was no negative feedback,” said the second source. “The dismissal seriously really surprised everybody.”

The first source said the palace did not officially tell Agbal he was being dismissed until very late on Friday, March 19. Just after midnight, Erdogan’s order was published.

Minutes after financial markets reopened on March 22, the lira had lost 15% of its value.

Since then, Erdogan dismissed a bank deputy governor. A party leader said he is planning a cabinet shuffle in which analysts say Albayrak could resurface. The government has not commented on a possible return of the minister.

Soner Cagaptay, a director at the Washington Institute for Near East Policy, said “palace politics” and rivalries played a role in Erdogan’s recent decisions, and Agbal’s sacking could pave the way to a comeback by Albayrak.

“Erdogan's decisions are increasingly undermined by clique politics,” he said.

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