June 12, 2012
Image Credit: Central Bank of Turkey
“… Reducing inflation from 10.45% to the 5% target within 12 months would lead to unfavorable fluctuations in economic activity…”
— Erdem Basci, quoted in the Financial Times
It may be a bit unusual for a central bank governor from an emerging market economy to hog the limelight. But then, Erdem Basci, the current governor at the Central Bank of Turkey has always been known to think out of the box, be it on policy matters or his plan to make Istanbul a financial center.
Though firmly grounded in the principles of economics, thanks to the training received from institutions such as Bilkent University and Johns Hopkins University, Basci, is no bookish academic. Prior to joining the central bank, he worked as an advisor to his former school mate and economy minister of the country, Ali Babacan, who has since become the Deputy Prime Minister.
Widely regarded as an economist of repute, Basci also served as an assistant professor at Bilkent University in Ankara, and in 1999, lectured at the University of York in the United Kingdom, according to the information available on the Central Bank of Turkey’s website. Having published his research papers in respectable economic journals, Basci served as the deputy governor of the Central Bank of Turkey from 2003 until he was elevated to the top position in the bank on April 19, 2011.
On that day, not many eyebrows were raised. Widely seen to be the successor to Durmus Yilmaz, the Erdogan administration has placed its faith in Basci, demonstrating its desire to keep the important position free of political appointees. Investors also cheered Basci’s appointment as he asserted his intent to adhere to the current monetary policy. Basci’s journey to the top central bank post has had a few twists and turns though, as former president Ahmet Sezer vetoed Basci’s nomination by Erdogan for the post five years back. But this time around was a charm.
Indeed, Basci, while serving under Yilmaz, is widely regarded as the chief architect of what is known today as Turkey’s “unorthodox” monetary policy. While most emerging market policy makers decided to hike interest rates, Basci reduced interest rates, advocating raising reserve requirements for banks to rein in credit growth. In fact, the policy decision inspired other emerging market economists.
Coming into office, there was no honeymoon period for Basci, a veteran and deputy governor at the Turkish central bank. Basci began his task in right earnest, saying the bank’s priority would be to narrow the current-account gap and reduce loan growth. When Basci took over, the inflation rate stood at 4%, which was the lowest in four decades, while the economy had grown at the rate of 8.9% in 2010.
Some months down the line, Basci realized that inflation was steadily climbing and that he had to do something about it. Stoked by the Euro-zone crisis and the increase in consumer prices, the current account deficit was near 10% of the GDP, inflation expectations were above 9%, and the Turkish lira was in a free fall. The obvious solution was to put an end to the low interest policy, which was in place for too long. The decision led to an increase in the cost of borrowing in the economy. Though the move invariably resulted in a slowdown in economic activity and affected the equity markets, the decision to cut interest rates proved to be right one eventually. The proof of the pudding, as they say, is in the eating. The latest inflation figures were clocked at 8.3% in May 2012 compared to 11.1% in April, while economists had expected inflation to remain at 9%.
Again, there seems to be a method to Basci’s obsession with policy maneuvering. Economy watchers seem to think that the incumbent central bank governor is a master at cutting interest rates without actually loosening monetary policy. A case in point, Basci reduced the overnight lending rate to 11.5% while maintaining the one-week repo rate at 5.75%, as a Reuters writer pointed out in her blog. The central bank, the writer explains, is following a flexible policy of adjusting its monetary policy almost on a daily basis by striking a balance between the lending and borrowing rates.
Whatever said, various measures implemented by Basci appear to be paying rich dividends. The current account deficit, long known to be the bane of the Turkish economy, stood at $4.2 billion in February 2012 compared with $6 billion in the year-ago period, according to an FT report. Economists say the deficit is likely to come down to 8.7% of the GDP by the end of this year compared to about 10% of the GDP last year. Actually, the reduction in the trade deficit recorded for the month of March was a clear indicator that the current account deficit too would be reined in sooner than later.
Notwithstanding Standard & Poor’s recent downward revision of the country’s long-term sovereign debt, Basci is very realistic when he says that economic growth will remain moderate this year. The governor also underlined the fact that the bank’s policy decisions are aimed at bringing down inflation to the level of 5% by the middle of next year.
In a democracy like Turkey, which has a fast-growing economy, Basci is up to task. Going by a recent report in the WSJ, moves are afoot to move the central bank headquarters from Ankara to Istanbul. Clearly, the much-awaited decision would go a long way to make Basci’s dream of transforming Istanbul into a financial hub a reality. And when you think outside the box like this central banker, perhaps just about anything is possible.
Subscribe to get our global publications by email.