Sources: M3 from OECD database and nominal GDP from IMF database, as at February 2022.
The medium-term relationship between money and nominal GDP growth in Turkey, 1988-2020
Five-year moving averages of annual % changes, with 1990 being the start of the first five-year period
Comment on monetary trends in Turkey
When the Ottoman empire, came to an end after the first world war, Turkey was a rather backward, mainly agricultural nation. Industries and a service sector began to develop in the 1920s, with the government rather than the private sector the dominant player. The country has suffered frequent economic crises, the worst of which occurred in the late 1970s and early 1980s. Broad money growth expanded by over 500% between 1979 and 1982, while inflation rose to over 100%. The economy opened up in the 1980s but the country continued to be beset by high inflation. In the 1990s, many Turks converted their assets into US dollars as the national currency, the lira, was losing so much value. Money growth continued at a high level and inflation remained a persistent problem until the early 2000s, rising to over 60% in 2001.
The Central Bank of the Republic of Turkey had been established in 1930. It was intended to be an independent organisation and although the Treasury of the Turkish government held shares, these were not permitted by law to amount to more than 15% of the bank's total capital. In 1970, at a time when the country was moving towards a more planned economy, the law was changed and the Treasury shareholding was increased to the point when it became the majority shareholder. After the 2001 inflation crisis, the central bank was given a new mandate which made price stability its priority. In theory, this mandate is still in force, but after more than a decade of relative stability in recent years, President Erdoğan has insisted that interest rates must be kept at a low level, believing this will make Turkish exports more competitive. The net result has been a surge in broad money growth and another bout of high inflation. However, in the spring of 2022, even with consumer prices rising at an annual rate of almost 70%, the Central Bank has not implemented any monetary tightening, which is essential if inflation is to be brought down.
