Turkey’s Economy from different perspectives after 1980

Assist. Prof. Dr. Cengiz Doğru

The Central Bank of Turkey has designed and implemented such monetary policies appropriate to the economical needs and change of the World under the concepts of globalization, financial liberalization, financial deepening, and financialization concepts in accordance with the Turkish Government’s monetary and fiscal policy.

Monetary policy tools used by central banks are open market operations, discount lending, and reserve requirements. Many central banks design and implement their monetary policies around these instruments.

2 Decisive Monetary Policy Periods of Turkey

In this section, important developments affecting the monetary policy will be classified and explained in chronological order in order to cover the significant changes and developments in which they are involved.

2.1 Pre-1980 Period Monetary Policies

Although the subject of this book is defined as post-1980 economic developments, in order to evaluate the post-1980 developments and the macroeconomic framework, the analysis of the previous periods is important at this stage. Therefore, the key developments affecting the monetary policy in the pre-1980 period are summarized below.

2.1.1 Establishment of the Republic Central Bank of Turkey

The Central Bank of Turkey (hereinafter referred to as the Central Bank) started to operate as the national Central Bank of the young Turkish Republic in 1930. The Central Bank has been defined as an independent and autonomous body, and these peculiarities were emphasized on its establishment law and its shareholders’ agreement. Besides, Central Bank’s primary objective is defined to support the economic development of the country. According to the founding act, Central Bank is granted with the exclusive privilege of issuing banknotes in Turkey.

Furthermore, the Bank was also authorized to set rediscount rates, to regulate the money market transactions and the circulation of TL, to execute Treasury operations, and to take all necessary measures for the sake of safeguarding the value of the Turkish currency. Central Bank also was assigned as the treasurer of the Government (CBRT, 2018a).

In the 1930s, the Government was the unique authority to set exchange rates under the fixed exchange rate regime in force at that time. Since the main payment instruments in the country were checks and promissory notes other than money, the Central Bank used the rediscount rates mechanism effectively as the main monetary policy tool. In contrast to developments in the World, the 1930s were a period of low inflation in the country.

2.1.2 World War II and Its Implications

Despite not participating in the war, Turkey was affected by the negative conditions of World War II in the 1940s. Under these adverse conditions, the Government used the Central Bank resources for financing budget deficits and other public finance needs instead of using these resources for implementing independent monetary policy. For this reason, economic and fiscal conditions deteriorated between 1938 and 1948.

The Central Bank implemented a monetary policy for achieving growth and rapid development as a target in the 1950s. Hence the Government began to finance economic growth with Central Bank resources. In line with these targets, the Central Bank provided short-term advances to the Treasury for the first time in its history.

2.1.3 The Importance of the State Planning Organization on Monetary Policies

Turkey adopted the planned economy in the 1960s. In the same year, the Undersecretariat of State Planning Organization (SPO) was founded and started to prepare five-year development plans for the country. These plans were covering all aspects of the economical targets such as monetary policy, fiscal policy, growth, employment, inflation rates, etc.

Besides, these plans were mandatory to be implemented for the public sector. However, plans were encouraging for the private sector with its special stimulation and bolstering programs. The Government carried out economic and industrial developments in the country with the help of these plans. Under these circumstances, the Central Bank implemented expansionary monetary policies and perpetually continued to bolster the Government budget’s financing needs as the Government’s sole treasurer in order to reach planned targets.

Meanwhile, the control mechanisms of the fixed exchange rate regime were gradually transferred to the Central Bank. It was started to regulate this subject with its circulars and communiques such as Communique on the Protection of the Value of Turkish Money and Capital Movements Circular.

The new Central Bank Act (No: 1211) was accepted in 1970 by the Parliament with introducing new concepts for efficient central banking. With this new act, the Central Bank increased its power on monetary policy instruments. In addition, the new law brought a compulsory rule that the Government should ask the opinion of the bank about money and credit-related applications and implementations.

Moreover, the Central Bank was authorized to conduct open market operations to regulate money supply and liquidity according to financial markets’ needs like the other pioneer central banks such as Federal Reserve Bank of the United States and the Bank of England of the UK. The Central Bank also was permitted to grant medium-term loans for the purpose of supporting investments and economic development. The amount of advances available to the Treasury was raised to 15 percent of the budget appropriation for the related year. During these years, the collaboration of the Central Bank and the State Planning Organization was a very important element for achieving targets of the monetary policy.

2.2 Monetary Policies of the 1980–1990 Period

In this specified decade, there have been important changes in monetary policy practices in Turkey due to experiencing some significant development such as 24 January 1980 Decisions, September 12 Military Coup, and bankers’ bankruptcy scandal. In this case, the Government and the Central Bank responded to these negative developments with new monetary policy practices.

2.2.1 Decisions of 24 January 1980

In the early 1980s, the financial liberalization thoughts were becoming more significant throughout the World. Simultaneously, there were unprecedented changes in the Turkish economy in the 1980s.

The Government announced the structural conversion decisions on the economy which was called the Decisions of 24 January 1980. The impact of these decisions affected the whole national economy for almost four decades, still continuing to do so.

The Government has decided to adopt free market economy in light of these decisions. Therefore, floor and ceiling price applications were abandoned for achieving financial liberalization process under the concept of free market conditions. Besides, foreign trade regulations were amended to provide more liberal and competitive currency and investment environment.