February 13, 2013 / 12:01 PM / 5 years ago

UPDATE 3-Cautious Turkish central bank pressured by growth-hungry govt

* Minister says 2012 growth seen at 2.5 pct

* Central bank cautious not to stoke inflation

* Govt wants strong growth as elections loom

* Central bank document defends need for independence

By Seltem Iyigun

ISTANBUL, Feb 13 (Reuters) - Turkey’s economy minister took another swipe on Wednesday at its central bank for failing to do enough to support economic growth, the latest round of a spat which has raised concern about the bank’s independence as elections loom.

One of the world’s best performing economies through four years of financial crisis, Turkey expanded just 2.5 percent last year, down from high single-digit growth in previous years and below the 3.2 percent hoped for by the government, Minister Zafer Caglayan was reported by broadcaster CNBC-e as saying.

“We will not achieve what we expected last year. This is what I meant when I said ‘let’s put the foot on the gas’,” Caglayan was quoted as telling reporters during his return from a trip to Libya.

His comment was an apparent reference to Central Bank Governor Erdem Basci’s statement in late January that the economy has “disembarked from a plane and was travelling on the highway” following a soft landing last year.

Both Caglayan and Prime Minister Tayyip Erdogan, whose government has built its reputation on strong economic growth over the past decade, have picked up on Basci’s analogy in recent weeks and used it to castigate his cautiousness.

“Turkey won’t reach its 2023 goals through the highway, friends, we need to fly,” Erdogan told a Turkey-Slovakia business forum last week.

The central bank has been performing a delicate balancing act, trying to reinvigorate domestic demand without allowing loan growth to accelerate so quickly that it stokes inflation and widens the current account deficit, Turkey’s main economic weakness.

Last month, it cut both ends of its rate corridor but raised reserve requirements in a bid to control rapid loan growth and prevent excessive lira appreciation.

Its complicated policy mix has drawn criticism from international investors and economists in the past, but has largely come up trumps by keeping Turkey growing steadily and robustly at a time when others are not.

But the bank’s caution has raised the hackles of some ministers who, like Erdogan, view strong growth as the top priority. Caglayan was quoted by the Hurriyet newspaper this month as warning Basci he was a civil servant who should know his place.

“Everyone should know his own position and limits. The central bank is appointed and relieved of its duty by government decree. It is also the government that writes the central bank law and can change it or not,” Caglayan said.

“We need 6-6.5 pct of growth on average. You can’t go that fast on the highway. You can reach 6.5 pct of growth by flying ... We will not leave Turkey’s success to the central bank governor.”


Erdogan’s government has seen a near tripling of per capita GDP in nominal terms over the past decade, and is keen to maintain that record with local and presidential elections due next year.

“As much as investors also like to see Turkey’s economy ‘fly’, they typically prefer it to be a well-controlled flight, and possibly only a ‘fast drive’ if that is all the global environment is supportive of,” said Christian Keller, head of emerging Europe research at Barclays Capital.

“Investors would likely not want a scenario where the central bank excessively eases monetary policy to boost credit growth and depreciate the currency, only as a consequence to see rising inflation and a re-widening of the current account deficit with a few months lag.”

Political pressure on the central bank is nothing new.

Erdogan repeatedly said last year he wanted real interest rates of zero percent, saying high rates amounted to modern-day theft and lashing out at what he called an “interest rate lobby” of investors who then wanted higher rates.

Maya Senussi, an economist at Roubini Global Economics, said the government’s aim may be to force the bank to keep rates low while upping public sector spending in the run up to the polls.

“That would aggravate the problems of inflation and Turkey being overly reliant on consumption,” she said.

The central bank published a 22-page document on Jan. 30 asserting the importance of its independence, one of a series of academic publications which a bank official said were aimed at educating students of economics and monetary policy.

“Independence is a prerequisite which enables central banks to reach their price stability targets more successfully by making them credible,” it said.

Students may not have been the only target audience.

The document was prepared last year but the timing of its release on the central bank website, as well as its reference to elections, raised speculation in the Turkish media that it was part of a defence against the government onslaught.

“Governments may sometimes abandon policies which they have previously announced and apply policies to increase growth as they focus on elections in a way that surprises economic bodies,” the document said.

“As a consequence, the (desired) growth cannot be reached in the long term and inflation sets in at a higher rate.”

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