Mr. Erçel reports on medium and long-term prospects for the Central Bank
Address by the Governor of the Central Bank of the Republic of
of the Republic of Turkey
Turkey, Mr. Gazi Erçel, before the 66th Shareholders' General Meeting, in Ankara, on 28/4/98.
A detailed account of economic developments during 1997 is given in our annual
report for that year which has already been delivered to you. We are keeping the public
informed of our expectations for this year through the quarterly announcements of our monetary
programme. Today, instead of repeating these short-term perspectives, I would like to speak of
the medium and long-term prospects of the Central Bank. For the last two years, my discourse
has touched on what kind of institution an ideal central bank should be. Today, I want to
consider this matter in a more detailed way.
In recent years, there has been a worldwide trend towards simplification of the goals
of central banking. This has led to a reduction of the responsibilities they take on. Funding their
governments, for example, is no longer the main purpose of central banks. There is none among
the western central banks that aims at achieving full employment of the highest level of
production. Today's modern central banks have only one aim: to maintain price stability.
It is not surprising that the Central Bank of Turkey, one of the most important
institutions of the Turkish economy, which hopes to become integrated with the western
economies, is affected by these trends in modern central banking as it maps out its medium and
long-term strategies.
Accordingly, the main goal of the Central Bank of Turkey, like that of other central
banks, should be to maintain the stability of prices in the economy.
At this stage I would like to clear up two points with respect to the price stability
target. First, the Central Bank's price stability target and its responsibility for price stability are
two different issues. The price stability target assumes a stability which exists under conditions
of low inflation. Therefore, the economy has to undergo a "disinflationary process" before the
Central Bank assumes responsibility for price stability.
It is well known that in Turkey, which has been experiencing high inflation for years,
reducing inflation to the levels of the western economies will require a comprehensive effort and
is not a process which can be accomplished by the Central Bank alone. The Central Bank can
track the price stability target as a part of the larger disinflationary programme. I believe that
once low inflation rates have been achieved by means of such a programme, it will be a rational
decision to make the Central Bank responsible for maintaining price stability.
The second point I want to stress concerning the price stability target concerns
microeconomic functions of central banks. Efficient operation of a payments system and
supervision of the banking sector are two other basic functions of a central bank. These two
functions can also be performed in a way that supports price stability targets: indeed, a sound,
effective financial sector and payments system are necessary conditions for price stability.
Duties assumed by the Central Bank of Turkey in the economy, which aims at price
stability, should be consistent with the target. Functions that conflict with the price stability
target or which cause difficulties for the achievement of this target should not be assigned to the
Central Bank. And this should be the basic theme of the Bank's medium and long-term strategic
planning.
Whether or not those functions assumed by the Central Bank as a result of such
factors as the country's geographic size, history, legal structure and degree of technological
development operate as impediments to the achievement of stability targets, can be examined by
means of several criteria. Effective use of monetary policy is an absolute necessity for a central
bank that takes price stability as its first priority. We must therefore review those functions of
the Central Bank that interfere with the effectiveness of monetary policy.
At this point, I would like to emphasise the importance of increasing the Central
Bank's control over its own balance sheet, which is one of the main conditions required for the
effective implementation of policies, mainly monetary policy, that must be adopted in order to
achieve the price stability target. Over the past decade, substantial improvements have been
visible in the Central Bank's balance sheet, especially on the asset side. Foreign assets
increased, while domestic assets dropped sharply due to the decrease in loans to the public
sector, including valuation accounts. The final step to be taken in this area will be to reduce, by
law, the advances made by the Central Bank to the Treasury to zero. Pursuant to the protocol
between the Central Bank and the Treasury, signed in the second half of last year, the
effectiveness of the monetary policies pursued by the Central Bank increased during this period.
An amendment to our laws will ensure the continuance of this favourable condition. And the
revision of the financial relationship between the Central Bank and the Treasury and the increase
in the Central Bank's control over its balance sheet will aid the achievement of the price stability
target.
But the structural improvements seen on the asset side of the Central Bank's balance
sheet in recent years have not been matched by similar improvements on the liability side. Our
Turkish lira liabilities represent a minor share in our total liabilities. To improve this
unfavourable situation, which can be seen as the reflection in our balance sheet of high inflation,
will require a lasting reduction in the inflation rate, which is the basic reason for this problem.
Converting our liabilities into Turkish lira is one of our goals for the medium term.
Independence is of great importance in the medium and long-term perspectives of the
Central Bank. An independent central bank, with respect both to its goals and its instruments,
will promote the achievement of the price stability target. A central bank which is independent
with respect to instruments will implement its monetary policy effectively.
It is also recognised that a central bank which is independent of political authority
will play an important role in minimising fluctuations arising from political uncertainties.
Today, it is apparent that economies with independent central banks that have
maintained monetary and financial stability are very strong.
The basic features of the Central Bank's medium and long-term strategies are to
choose price stability as its main target, to establish consistency between its functions and its
main target, and to revise any functions that may impede the implementation of its monetary
programme and in this context to achieve its independence.
On the other hand, the organisational efficiency of the Central Bank can be seen as
the complementary element of this strategy. There is no doubt that a central bank with qualified
personnel, which fulfils its duties with high productivity, will earn full credibility. Distinguished
guest, here let me quote one of the economists: "Credibility cannot be purchased, it must be
acquired. And this is achieved step by step, through consistent policy implementations."
To carry the Central Bank, one of Turkey's most credible institutions, into the future
with this in view is the fundamental mission of my fellow workers and myself.