A brief history of Central Bank independence in Turkey

The recent tug of war between President Recep Tayyip Erdo?an and Central Bank Governor Erdem Ba?ç? over Turkey's monetary policy has inflamed debate on the independence of the Bank. The struggle has been interpreted as the latest battleground in Erdo?an's bid to bring all decision making into his own hands, but it should also be considered as part of a longer-term process - as the prudent economic policies followed during the AKP's early years are jettisoned in favor of short-term populist measures.

While nominally independent since its establishment in 1931, Turkey's Central Bank was only granted formal "instrument independence" in 2001. The move was part of root and branch institutional reforms passed after the meltdown of the Turkish banking system in 2001, when the country's economy shrank by 5.3 percent and GDP per capita declined by 6.5 percent. The massive crisis clearly signaled that Turkey's economic institutions needed radical overhaul, and the former vice president of the World Bank, Kemal Dervi?, was parachuted in to oversee a sweeping consolidation of the financial system. The Banking Regulation and Supervision Agency's (BDDK) reforms included stringent new regulations and the legalization of Central Bank independence. Henceforth the Central Bank's primary objective was to achieve and maintain price stability, while the Bank would determine at its own discretion the monetary policy it would implement and the monetary policy instruments it would use. A new law also prohibited the Central Bank from granting credits to the Treasury and other public institutions. 

The overall reform process was very painful and led to the liquidation of half of all Turkish banks. One of the primary aims of the changes was to achieve financial stability by...

Continue reading on: