Central Bank Governance in Emerging Markets

Tuesday, April 16, 2024
Alex Lee/Reuters

Governor, Central Bank of the Republic of Turkey

Governor, South African Reserve Bank


Founder and CEO, RockCreek; Member, Board of Directors, Council on Foreign Relations

Central bank governors from some of the largest emerging markets discuss the economic outlook in their countries, how their banks have addressed global inflation, and opportunities for sustained economic growth.

This meeting is held in collaboration with the Peterson Institute for International Economics.

BESCHLOSS: Good afternoon, and very welcome to today’s Council on Foreign Relations meeting in collaboration with the Peterson Institute for International Economics.

My name is Afsaneh Mashayekhi Beschloss and I’m founder and CEO of RockCreek and a member of the board of directors here at CFR.

I’m joined today in person by Fatih Karahan, governor of the Central Bank of Turkey, and also Lesetja Kganyago, the governor of the Central Bank of South Africa—and, by the way, congratulations; recently renewed and for a third term.

So our audience today consists of Council members in person and over eighty members are joining us virtually. So we’re very, very fortunate to have all of you in the room and our two speakers really do not need an introduction but just very quickly I’ll just say a few words.

Fatih, obviously, has a Ph.D. in economics from U Penn and has—and practiced actually here as a central banker when he was at the Federal Reserve Bank of New York and also worked in a number of areas there and was also, very interestingly, a senior economist and principal economist at Amazon before going back to Turkey and becoming the deputy governor and then the central bank governor at a very, very interesting time.

Similarly, Lesetja, who’s one of the oldest serving central bank governors, did his economic studies at SOAS, at London—at the University of London, and before joining the central bank there was director general of the national treasury, had long experience in the financial sector, and represented South Africa at places like the World Bank next door and G-20. And of course, he chairs, among other things, the central bank governor—as central bank governor of the South Africa Development Community and co-chairs the Financial Stability Board’s regional consultative group of sub-Saharan Africa and a number of other groups that—I think I will just stop here, though, in terms of going through the full list.

But I think we’re at a very interesting time and particularly the way emerging markets are diverging from each other both in terms of growth, in terms of central bank policies, in terms of inflation and rates and effects we are very fortunate to have two of the most experienced, most interesting central bank governors with us.

And I was going to maybe start with you, Fatih, if I may, and it’s sort of—we look at Turkey. I first wanted to sort of for you to give an overview of where you think the economy is and as central bank governor what are your priorities today?

KARAHAN: Thank you, Ms. Beschloss. Thank you for having me and thank you, everyone, for coming.

The primary problem that Turkey is facing in the macroeconomic landscape is, obviously, inflation. It’s running close to 70 percent now, is on track to go above 70 percent by May. We think it will peak around 73 (percent), 75 (percent), and as a result of high inflation and, obviously, inflation expectations being unanchored there’s a myriad of other problems that are bothering the Turkish economy. So the fight with inflation is extremely important here.

One is the current account deficit. When inflation expectations deteriorated over the—you know, the last few years gradually the demand went up and imports skyrocketed. There was a lot of demand for gold as well. So that led to an increase in the current account deficit, which made the country more vulnerable to external shocks.

More generally, demand is very high and inflation expectations are very high, and it’s making the investment climate not so favorable. So we’ve had very little contribution from investment and also very little contribution from the experts—actually negative, if at all, in 2023.

So the main program that we’ve been very engaged with, you know, it has also, obviously, a fiscal component as well. But as the monetary policy authority we’re trying to reduce inflation and we’ve engaged in a comprehensive tightening program that started last June and as of then policy rate—the policy rate was about 8½ percent.

So we’ve hiked rates. Now we’re at 50 percent and that led to somewhat of a normalization in demand. It’s an ongoing process, obviously. Monthly inflation has been declining through December. There was a bump over the last few months because of minimum wage increases but, overall, they are on track for reaching our inflation target, which is set for this year 36 percent and for next year it’s 14 percent and for 2026 it’s 9 percent. So we want to go back to single digits.

Turkey is very experienced when it comes to fighting inflation. In 1990s we had very high inflation as well, at these levels if not higher. There was another comprehensive program at the beginning of 2000s and we went back to single digits so inflation was single digits for a long period of time until 2018.

So we want to go back to single digits and eventually our target of—official target of 5 percent. So we’ve done a lot of tightening. Credit conditions—our tight credit growth has come down quite a bit. Demand is moderating and, obviously, we’re monitoring incoming data to assess whether our current stance is appropriate or not.

Let me stop here. I’m sure we’ll get into more details later.

BESCHLOSS: Absolutely.

And as you were talking I was just thinking you have been pivoting and changing central bank sort of governance towards a more orthodox central bank policy and one that is sort of reintegrating the Turkish Central Bank also closer into global financial markets.

How hard was that? Because that was a pivot—that was a change.

KARAHAN: So our primary objective, of course, is to reestablish the policy rate as the main tool of monetary policy. In the past it was a combination of the policy rate but more also through macro prudential regulations that regulated how much credit banks can issue, how much they can grow, what rates they can charge.

So, for example, upper bounds on the interest rates they can charge and things like that. That made—well, that was—that turned out to be ineffective but also that made life very difficult for the banks. It also reduced the efficiency of the financials especially the treasury bond market. Did not reflect the macroeconomic fundamentals, the pricing. They did not reflect the fundamentals.

Now, with our pivot we’ve made sure that our primary tool is always the policy rates. So our go-to tool whenever we see a deterioration in the inflation outlook relative to where we think we were has been the policy rate.

Now, the challenge has been, of course, managing expectations. Since the day we started tightening and when I was appointed and as a deputy and the other deputies were appointed on the same day the first question we always were asked was how long can this last and how high can you go, and we always signaled that we’re going to do whatever it takes, and yet it was not that easy to convince markets that we are very serious in fighting with inflation.

But, of course, actions speak louder than words. We’ve done a huge amount of tightening, much more than markets have anticipated, consistently so. For example, when we were at 25 percent people were—the markets were expecting the terminal rate to be 30 percent even though our messaging was not that way.

When we went to 30 percent then expectations moved to 35 percent as the terminal rate. So it was a little bit hard to move the markets beyond the actual policy rate increase. But I think we’ve done enough.

Well, I don’t want to say enough but we’ve done a lot and we’re ready to do more to regain credibility and also to reestablish policy—the policy rate as the primary tool so that we can better manage inflation expectations.

BESCHLOSS: And, certainly, doing a rate increase ten days before the election I think also made its point.

If I can go to Governor Kganyago and ask you, if I may, if you could give us also sort of an overview of what’s going on in South Africa and what are your priorities at the central bank?

KGANYAGO: Dealing with inflation.

BESCHLOSS: Dealing with inflation. OK. (Laughter.)

KGANYAGO: No. I mean, very clearly at the moment inflation is at the top of mind of every central banker, at least I’ve listened to Fatih talking about reaching some target in 2026. When you speak to the central bankers everyone is going to reach their target in 2025. That just seems to be the narrative.

We had had a protracted period after a long time where we had eleven consecutive months where we were outside of our inflation target. We target a rate of 3 (percent) to 6 (percent) but starting in 2017 we started to say that we are aiming for the midpoint of that inflation target, which was 4.5 (percent).

And when the great lockdown ended we saw inflation rise and it did rise rapidly and it peaked at 7.8 percent in July of 2022. But we started tightening policy in November 2021 because we were worried about the trajectory of inflation.

It turned out, with hindsight, to have been a good call because advanced economies’ central banks only started adjusting policy in 2022 and, again, you’ve got to give it to the Latin American central banks which started tightening policy as early as—


KGANYAGO: —in May 2021 and you could see the benefits from the—through the disinflation process that you see.

So we are within the target but we are nowhere close to the 4.5 (percent) that we aim for and we expect to hit that rate in 2025 and sustain it there. So around—when you talk with all the other central bankers it’s—clearly inflation is at the top of the mind.

Let me bring this other dimension to say that monetary policy has done the heavy lifting to deal with inflation. What has not come to the—to the—(inaudible)—the role of fiscal policy in the disinflationary—disinflation process. For some reason fiscal authorities love stimulus and when the stimulus has to be removed they try to rationalize it as to why it must stay in place and, again, you will find that it tended to be the narrative that the fiscal stimuli that was there was maintained for longer than what was necessary. So that is not helping in the disinflation process.

And the third and last point that I would like to make I feel that the kinds of responses that we saw to the pandemic from the fiscal authorities, from the monetary authorities, also meant that the difficult structural changes that were supposed to take place could be shifted out, and those challenges are still there and they will have to be tackled and South Africa faces its own structural challenges.

We are a fairly energy-intensive economy and for the past ten years energy has been something that we were not particularly blessed with. We had serious energy shortages at in the—at the end of the great lockdown we also experienced serious logistic problems.

We are far from market and we are an exporter of bulk commodities and that needs a functioning logistical system, and so that meant that those structural constraints actually had an adverse impact on economic growth.

So even as we were busy tackling inflation, we were still having fairly low growth. And what we have is also that it is not just cyclical growth that was becoming the problem; that potential growth in the South African economy had reduced. And at the moment, economists—we central bankers like looking at measures of slack, and one of those is the output gap. And it’s not particularly useful at the moment because we have—the output gap basically closed and the economy last year only grew by 0.6 percent. So that says to you that those big structural changes have got to take place in order to lift the economy.

One last word is that in spite of all of this we have found the South African financial system to be very resilient. We do not see indications of stress in the financial system. The—(inaudible)—are well-capitalized, it has got ample liquidity, and it is functioning even under very difficult economic conditions.

So let me pause there.

BESCHLOSS: It’s very interesting what you’re saying because as you said, for example, your biggest four banks are very stable. They’re growing, you know, as you said. But it seems like a lot of the loans they’re giving is going to retail versus industry and corporate sector, and going back to the point that you made about, you know, inflation, obviously, is super important and sounds like you’ll be—you’ll stay hawkish and keep rates higher for longer.

At the same time, there’s fiscal policy but on the monetary side there’s also the issue of employment and growth at the same time as what you highlighted, which is the issue of the blackouts in electricity and, you know, a country that is also making investments in climate, which is another topic Mike Froman is doing a lot of work on these days at CFR.

So going back to see all of those things how do you—because you do need to also provide credit to the corporate sector for it to grow, right? So in a tighter monetary policy how do you achieve that? Is there any way sitting where you sit you can help?

KGANYAGO: Well, credit is flowing in the South African economy, but it is not the flow of credit that would create worry of you are having this surge in credit. Credit growth is growing just around the inflation rate, yes, and loans are extended to both the corporates and to the households, but nothing robust that you would associate with.

I think that the point to make, though, is that it is not like the banks are not lending. The banks would lend to corporates if corporates are investing. Corporates invest because there are opportunities and the economy is also beginning to grow and that—giving opportunities and absent that and then an environment where you still have uncertainty you do not see a huge surge.

What we have seen, though, had been that credit tended to go into investment in the renewable energy for the simple reason, again, there is demand for it. You are facing a(n) energy shortage and people are finding that they must invest in alternatives and the alternatives have been in the main in renewables.

So you would have seen credit going into the renewable sector and that is welcome. What has been sort of, like, lagging behind which is now only really kicking off now is lending into storage capability because, you know, we have got lots of sunlight but then the sun sets at some stage and we must figure out if we could store that.

And so that becomes important for us and we look at that very closely. We still see investment in the new year growing just around 4 ½ percent. We probably would be wanting to see it grow faster because our investment to GDP ratios now have dropped around—just around 15 percent. It peaked at about 21 percent in 2008 so there is massive catch up to be had here.

BESCHLOSS: Thank you so much.

Governor Karahan, if I could ask, the central banks in Turkey had the large swap position, I think, still with the Turkish banks. I know it’s something that has been on your mind and where—so what role do you think the swaps will play going forward?

KARAHAN: Yeah. Thank you.

So using swaps for us on our end was a way to get liquid reserves in our reserves so have a healthy level of liquid reserves. We pursued that strategy until the end of December so basically until last—the end of last year.

Now, the problem has been, of course, that it creates excess liquidity in the system—Turkish lira liquidity—and so that made our life difficult in maintaining a tight policy stance, basically making sure that the financial conditions reflect the policy rate appropriately. But, of course, there were tradeoffs involved at that point.

But we’ve announced at the end of the year in our monetary policy statement that, going forward, we’re going to reduce the reliance on swaps for our reserves and we’ve done that all the way through, I think, end of February. There was a decline about maybe 5 (billion dollars), $6 billion in local swaps with domestic banks and that helped us a lot.

So we made sure that open market operations remained in positive territory so that now actually since February the financial conditions do reflect our policy stance a lot better than they did before.

Now, for banks they also like this because the duration of the swaps were for three months. So for them in an episode where rates were increasing, obviously, they use swaps for three months, borrow at cheaper rates. So that helped them maintain their balance sheet. It was profitable for them to use.

So it helped us. It helped them. Now that the hiking cycle is over and we want to be on top of liquidity management they don’t really want to rely on swaps and we don’t also want to have too many swaps so we’re going to reduce the reliance on swaps.

There was a bit of an uptick in March. Because of local elections there was a demand—increased demand for dollars so we relied on those swaps to make sure we have enough liquid reserves by then.

But that was a temporary period. So right now I think we have about $58 billion with local banks and swaps and our plan is to reduce it, going forward.

Now, one issue for banks is that they have a lot more FX deposits than they can lend so there’s a mismatch there, and it helps them manage their balance sheet, essentially, using local swaps.

So there’s still—there can be still some demand on the banking side, although over the last two months where we’ve tightened Turkish lira liquidity a lot so the credit rates—the loan rates have gone up quite a bit they’re at 70 percent for commercial loans and 80 percent for a consumer loan, so very high for Turkish lira loans.

So there’s more demand now for FX loans so maybe the mismatch will disappear and they also—their demand for swaps may also decline, going forward.

BESCHLOSS: So this sort of moving to de-dollar the Turkish deposit base you think for now is not the highest priority or it is a high priority?

KARAHAN: No, it is. It is a priority.

BESCHLOSS: It is? It remains a high priority?

KARAHAN: Yeah. Thank you. No, great question.

No, de-dollarization is one of our utmost—you know, utmost priorities and because of that we have extra regulations in place that incentivize banks to transition some of their accounts from FX deposits to Turkish lira deposits or from FX protected accounts to Turkish lira deposit accounts and they’ve been—you know, maybe with the exception of March they’ve been following that.

So the share of Turkish lira deposit went up from 30 (percent), 31 percent to 41 percent at its peak. Now, again, like in a couple of other things there’s been somewhat of a decline in March but we think that the trend will continue.

Now, part of that transition is because, obviously, the financial conditions are tight and the deposit rates are now on average, like, around 60 percent so very, very promising for people. Offers a pretty good return.

But part of that will come also when household expectations improve or firm expectations improve. So they’re a little bit more elevated relative to what market participants think. So if you ask market participants about their inflation expectations they give you a number of 36 percent for the next twelve months.

So basically by next March—from now to the next March they expect an inflation of 36 percent, which is our end of year target for this year. So they basically believe that we’re going to hit our target with a three-month delay.

Now, but households are a lot less convinced by what we’ve been doing, OK, so we have some work to do. But with inflation, of course, some of their expectations formation depends on actual inflation rather than macroeconomic fundamentals.

So we think with the summer months, with headline inflation also coming down, there will be some improvement in inflation expectations as well and then that will support the transition towards Turkish lira beyond what we’ve seen already, which was because of attractive deposit rates—attractive yields.

BESCHLOSS: Before we go to questions also you mentioned something in your earlier comments about the size of reserves and, obviously, the reserves have been swinging some in Turkey. Where would you like that to be and the relative importance of that relative to your inflationary goals?

KARAHAN: Thank you. No, another great question.

So reserves—net reserves excluding swaps are in negative territory. Obviously, in the medium term we want to improve that. Now, there are periods in which the goal of reserve accumulation and the goal of disinflation are in conflict or can be in conflict.

For example, where there are large portfolio inflows like we had in November and December at about $9 billion inflows that is normally a move that would make Turkish lira increase in value so it would appreciate in also nominal terms.

Now, in that period we figured, OK, we have to buy some of it because it’s a great opportunity. Now, you use that opportunity, but then you give up a little bit on the effects—so, basically, Turkish lira’s appreciation—which means inflation target. You’re basically giving up on that a little bit.

Now, our strategy going forward is that our utmost priority is disinflation and we will accumulate reserves as much as we can, depending on market conditions. We don’t want to be in a situation where we increase our reserves by a couple of billion dollars over a month or two but then lose out on the inflation goal because if you lose out on the inflation goal we lose the opportunity to control inflation expectations and that means that de-dollarization is going to be slower or maybe more difficult.

That means maybe more rate hikes may be necessary. It also means the reserves, going forward, may not be in great shape. So basically there’s a tradeoff between capitalizing on these opportunities immediately versus letting things slide a little bit but then win in the longer run with inflation and inflation expectations improving.

So that’s our strategy, going forward. In terms of an actual number there’s no number that we target. Obviously, in the medium term we want to have the—you know, be in a level where, you know, according to the international adequacy ratios we are in a healthy space. But it’s a little bit down the road.

BESCHLOSS: Thank you so much.

We’re now going to invite members to join the conversation with questions and I’m just reminding everyone that the meeting is on the record.

And we’ll take our first question from here in Washington but we will go to virtual questions. And please introduce yourselves.

Q: I’m Whitney Debevoise from Arnold & Porter.

You’re both governors of central banks here for the spring meetings of the fund and the bank. What signals are you getting about U.S. financial leadership—global leadership—as we go into these meetings?

BESCHLOSS: Do you want to go first?

KGANYAGO: I’m not sure I understand the question, but let me see what I have to do.

At least from South Africa we monitor what the Fed does. We do not follow what the Fed does. What do I mean?

The decisions taken by the Fed affect the world’s largest economy. We are a small open economy and so the actions taken by the Fed have got implications for the global economy. That’s how we would watch it.

And getting into these meetings what has become very clear is that central bankers, yes, inflation at the top of our minds, that everybody is looking at the tighter global financial conditions and whether they would loosen at some stage.

One of the things that we do that baffles me even as I get into the meetings is how the uncertainty had affected decision-making in financial markets, because, quite frankly, an inflation figure that comes out and surprises by 0.1 should be a nonevent. But if you find—if you look at the response of the financial markets because inflation came out 0.1 worse than what we had expected—sometimes it is 0.1 better than what we had expected—and there is all sort of excitement about it is just reflective of the extent of the uncertainty.

I think that if you talk to the central banks inflation had turned out to also be stickier than we had thought. A part of it is that, at least for advanced economies, the response by the advanced economies’ central banks came a little bit later than what it was supposed to—what was supposed to have happened and very clearly there was very rapid correction that took place from 2022 as the advanced economies’ central banks were tightening policy and I think that in this environment it is very important that complacency doesn’t set in.

The job on the inflation front is not yet done. I’m no expert on the U.S. economy so I always watch what the policymakers say. I know that people in the markets would look at what policymakers say and try to interpret what actually they are trying to say.

I take it for what they say because I expect them to also take things the way I say them and not try to interpret it. So leadership of the effort in this respect is really looking at what the Fed’s next moves are and what it means for global financial conditions.

As a small, open economy what we always face is that tighter financial conditions also mean I’ve got implications for capital flows and at least in our country we have experienced capital outflows.

As financial conditions tightened in the U.S. it eliminated the differential advantage that we had had over a period of time and it then led to a realignment of exchange rates globally and our response as policy—as a realignment of exchange rates takes place, we look at that and we say what would this mean for developments in our small open economy that we are in South Africa, and then end up having to calibrate policy on the basis of that only to the extent that we think that realignment could lead to second round effects in terms of a domestic price—a price formulation.

So that is—that will be my take.

BESCHLOSS: Governor Karahan?

KARAHAN: Thank you.

Yeah, I guess in terms of the meetings we’re here primarily to—first, to listen to the perspectives of other countries and learn how they’re viewing the different kinds of risks and what their outlook is and what their actions might be, going forward—I think that’s going to be very helpful—and then equally importantly, of course, tell our story where we’re at the turning points where we have a very serious fight with inflation so we want to tell more about the program, where we are, and what the risks are and what our plans are.

In terms of the actual global financial conditions I think two concerns for Turkey. One is, obviously, geopolitical risks. That’s—in the Middle East that’s always a factor but sometimes more than others.

And then on the other hand we have, obviously, the central banks of the bigger—biggest countries, the U.S. especially. Now, thinking about U.S. policy, I mean, there’s a—when it comes to central banking there’s always a tradeoff between forward guidance and data dependence.

You know, with forward guidance you can move the markets quite well. But this is a period in time where you don’t want to commit to something that you may not want to do in three, four months.

Now, the other extreme is data dependence. What we’ve seen now since, I don’t know, maybe November or so, every month every single data release the markets move wildly and just want to echo what you just said. You know, a tenth of a point here, a tenth of a point there—that’s an outcome of—I’m going to call it too much data dependence.

So, like, I think I remember in December the probability of a March cut was something like 60 (percent), 70 percent and, you know, we didn’t have it, and then was May. Not going to happen. Probably sometime later; I don’t know. People now talk about less than 2 (percent) or maybe some people started saying maybe none.

So we make policy because of this as if, you know, there’s going to be no cuts from the Federal Reserve and the ECB. I think that’s the right strategy, not necessarily because it’s the right forecasts. It’s more given that the risks are so high, you know, that’s probably the more prudent approach to making policy.

And then I guess the other thing related to that is Turkey is getting less than 1 percent of the flows to EMs already. So if the flows to the EM go up it’s not a big deal for us. What matters for us is to get a larger share from those flows and historically, you know, going back, I guess, maybe ten years or so that share was about 10 percent.

So there’s a long way to go for us to reestablish credibility and so on. So that’s really our primary concern. I don’t think, you know, the Federal Reserve action is going to mean—be a big deal for us in the inflation outlook over the next year or so.

BESCHLOSS: By the way, for anyone who’s not looked at Turkish equity markets I think they’re up the highest in any emerging markets this year.

KARAHAN: That’s good.

BESCHLOSS: I think there’s a question here.

Q: Thanks very much for those excellent presentations.

You’ve spoken about your own countries, and just to build up on the—build on the previous question, how do you look or assess—look at or assess the common global shocks on inflation, for example, and how important are they?

In particular, I’d like you to, you know, talk about what President Xi Jinping said the other day or yesterday that, you know, China is basically contributing to a lot of disinflation around the world and, you know, Chinese excess capacity is so large now that is this going to be a serious disinflationary impulse for all countries including for your own and is that something that you look upon with happiness or with unhappiness?

So what are the, you know, the global effects of, you know, oil shocks, China, U.S. policy, and so on?

BESCHLOSS: Who would like to go first?

KARAHAN: Sure. Sure.

Yeah. I guess—excellent question. Thank you.

In terms of common shocks, I think the first thing I think about is maybe geopolitical risks. I mean, it’s always a different risk. A couple of years ago it was the Russia-Ukraine war. Now it’s the Middle East.

These can work through a number of ways. Obviously, the most obvious one is energy prices and so specifically for Turkey, you know, we have a—we are reliant on energy so that’s a risk for our current account deficit.

Our current account deficit has improved a lot since the start of the tightening. I think it’s the number-one factor that we’re the most proud of. It’s improving quite fast, much faster than we were expecting. So in that sense, an increase in energy prices would be a risk to the—to the outlook.

And then, obviously, any kind of supply chain disruptions that might occur because of the ongoing issues, I think that is also a risk for us and for the world more globally. We’ve seen during COVID how important that is.

In terms of China, I think—you know, for many countries, I think China was a disinflationary factor for many years because of its import penetration in the different countries that was going up, that was providing competition for a bunch of different countries. Now, going forward, there’s a lot of debate where, you know, where that’s going to lead to. And not just because of China’s economy at the moment, but also because of the possible reorientation of supply chains. Maybe we’re not going to have a uni-model of production in the world. Maybe it’s going to be a bunch of different modes of production. And so the supply chains are going to be different. So maybe the cost structure is going to be different. And I do agree that—and I do think that is it’s not going to be as disinflationary as in the past. So there may be some reversal of globalization—not a complete one, but it will be a different kind of globalization with multiple centers of production. Yeah.

KGANYAGO: Well, I’m not sure that at the moment we can really talk about disinflation. And of course, we are basically faced with deflation, and that is more problematic for us. We are a commodity exporter. And to the extent that you have got a slowdown in the Chinese economy, it has got implications for commodity prices. And in particular, the property market uses bulk commodities. So it has got implications, for example, for iron ore. And so China is a very important trading partner for us, but they are buying commodities from us. We do buy a lot of manufactured stuff from China. So you might benefit from that, but it’s a double-edged—it’s a double-edged sword for us.

Broadly, on the other shocks, that as the great lockdown ended, the world experience serious supply chain bottlenecks. And it looked like as we were getting on top of those constraints, geopolitical tensions set in. And now it has got implications for shipping costs. If you can’t go through the Suez Canal, you have got to find the route around the Cape. But we are all surprised that you have to find the route around the Cape. That’s exactly why the Portuguese explorers took the risk in the first place. (Laughter.) Because for centuries that channel was a was a problem. And so you’re going to have to get around—get around the Cape.

But there’s another dimension that has got to be added now is the water levels in the Panama Canal, which is aging, to the constraints that we have we are seeing. So shipping costs, which go up. And it might have implications for important inflation, in as far as we are concerned. But it could add to inflation—to inflation globally. The geo tension—geopolitical tensions also demand higher energy prices. It’s a very important global shock that we all had to be alive to. And then—and thirdly is the impact of El Niño on food production and food prices, and how you think about that.

So the textbook will say to us, when you experience a shock you must look through the shock, look for any evidence of second round effects, and only react to the second-round effect. The problem is, if you’ve got this multiplicity of shocks all taking place at the same time, the price setters will have a different thinking altogether, which brings in itself different challenges. And thus, policy might have to act or even remain restrictive for longer so that inflation expectations do not de-anchor.


Q: Good afternoon. My name is Cecilia Fernandes from the IMF.

And my question is about the 25 billion (dollar) losses that the central bank of Turkey just materialize in 2023. I would like to know whether that is any type of strategy going forward as well, because, as we know, central banks cannot indefinitely print money, although that’s the perception of many in the public, that central bank can definitely making losses. But we know that the policy solvency is very important for the credibility. And also, especially now that the treasury is also facing deep deficits. So how do you see the sustainability of the equity of the central bank moving forward? And if that is any type of strategy also regarding that. Thank you so much.

KARAHAN: So, first, I don’t think the Turkish deficit situation is that bad. The debt is not that bad. The deficit, excluding earthquake-related spending last year—I’m excluding that because it’s, you know, maybe this year as well, it’s temporary—was 1.6 last year. It’s going to be a little bit higher this year for a variety of reasons, but it’s not a very high level compared to other EMs.

Now, in terms of losses, Turkey is also not the only country, is not the only central bank, obviously, to make a loss. When you raise rates—I mean, you know, this, obviously—there’s lots of channels through which, you know, that cause you to make losses. And we’re one of those countries. On top of that, of course, we had the FX-protected accounts that contributed to those losses as well. So we’ll publish more detailed figures at the end of this month when we have our general assembly. And we’ll publish more detailed numbers as to where exactly those losses are coming from, what they can be attributed to.

But I just want to say, you know, we’re not the only—the only country. And historically, Turkey has always made, you know, made profit—the Turkish central bank made all these profits that were remitted to the treasury. So our plan going forward is over the next few years, obviously, not to do remittances to the treasury, but kind of let those account for the further losses this year. It’s hard to say exactly how long that’s going to—that’s going to last. For a couple of years at least. It depends on, obviously, how the inflation—the fight with inflation continues.

BESCHLOSS: I think there was a question right here.

Q: Thank you to the Council and the Peterson Institute for hosting us. I’m Barbara Matthews. I run a small data company. So I have to take issue with the idea that one can be too data dependent. I’m also nonresident senior fellow at the Atlantic Council, and that’s actually where I’m going to ask my question.

Continuing on the notion of inflation, and I’d like to, in the medium term, think about the climate transition. You started that conversation. It’s very clear the climate transition is going to benefit some commodity exporters very well. It’s going to impact supply chains. It will also—renewable energy can be far more expensive to generate and store, particularly if one imagines in the near term a situation where the largest supplier of both wind turbines and solar panels may find it very difficult to get their oversupply into the market.

My question to you is, as you grapple with inflation over the course of the next two or three years, how are you thinking about it? The network for the greening of the financial system, central banking community, seems to be very active. The European Central Bank is very active in this space, has really gone all the way through to managing its balance sheet with a green lens. Not everyone has gone that far. How do you think about the green transition as you think about combating inflation, managing your balance sheet, asset purchases?

BESCHLOSS: It’s kind of interesting because, as you know, in the U.S., the central bank governor has been under pressure not to use the word—the C word, as they say. (Laughter.) And you have both used that word. And it is the elephant in the room for all governors, of course. Did you want to go first?

KGANYAGO: Yeah. I mean, you have raised a lot of issues that are fairly complex. Let me start this way and say that in the transition there are particular commodities that are needed for the green transition. Very important. Some of these commodities that you can find in South Africa. But we are not going to send people three kilometers into the belly of the Earth using solar panels, because we must bring them back up. (Laughter.) So the transition is going to be crucial that we understand that in the transition we might still be using the current date energy that we have to get the minerals that we need to do the green transition. It’s a very important point to make.

Second point is, I would like to take issue with you about the costs. Because the current technologies have not fully internalized what it actually means for the environment. And secondly, is that the cost of the new cleaner technology is coming down very fast. And we have got to sustain—to sustain that momentum. Thirdly, I get worried about one thing. So in the process of making this transition, some governments wants to declare certain commodities, certain minerals as strategic, which then complicates the transition. Certain governments would like to believe that certain technologies should not be available for certain countries, because they are strategic.

The point is, we have got one planet, right? So if you keep away the technology from us, because it is strategic to you, well, we will release the carbon into the atmosphere and the planet will be warm for all of us. So can we have a more meaningful conversation of this transition, and make sure that that transition, as we have characterized it that it must be just, that we actually make it to be just. Let me give you this other example. You see the world experienced a pandemic. And we said that none of us is safe unless all of us are safe. As soon as the technology to deliver vaccines against the coronavirus set in, what did you guys in the north do? You said, your citizens first. You kept the vaccines. And said, your citizens first. And you forgot that we said all of us must be safe.

And you see those things emerge with all these other technologies, with people declaring certain things to be strategic minerals, or strategic technologies, and so forth. You cannot deal with an issue as complex as climate change in that manner, because we have got one planet. And so we’ve got to have a meaningful conversation—a meaningful conversation about this. And I’ve got no doubt that we can have a transition to a greener economy if we, collectively as a global community, understand that humans are facing an existential crisis, and that we have got to be focused on making sure that we deal with that.

Lastly, on the central banks, central banks have got a role to play, but central banks are not going to be making distribution decisions. Those decisions must be made by the duly elected. Of course, we are professionals. We can make calls. But very—it will not take long before you start asking, these decisions are being made by unelected officials. So locate those decisions where they should be, that the elected officials should be the ones making those decisions.

And we’ve looked at these things. And climate change has got implications. People are not talking about the cost—just talking about the costs of the transition. The truth of the matter is that the climate change is already imposing massive costs on economies, is imposing massive costs on communities. And in the developing world—the region where I come from, it is now common that you would have massive droughts in the same country and floods in the same country in the same year, except that they are just taking place in different parts of the country. And so we’ve got to be alive to that. But we shouldn’t be—but central banks must play their role, but they should not be burdened with this because the decisions about distribution should be made by elected officials.

BESCHLOSS: Excellent point. And I think—I’m sure Mike will call on you when we do more work at CFR on climate. I think that will be important. Did you want to say anything on this point?

KARAHAN: I’m going to largely agree on a lot of the points. But, first, I want to clarify what I meant by too much data dependence. (Laughter.) It doesn’t mean—it doesn’t mean using too much data. It just means taking too much signal from a single place. I’m sure you know that. I just wanted to clarify that.

Now, in terms of climate, I think more generally—I think, you know, going back to maybe twenty years ago, central banks at a single mandate, its price stability. And the Federal Reserve has always been different. It’s a dual mandate. But, you know, aside from that. Now, every central bank also has an employment mandate, not explicitly but implicitly. That’s fine. That’s obviously understood. But now more and more things are piling up—inequality, climate change, I don’t know what will be the next one. So I think it’s a dangerous territory to get into political—issues that can be considered political, because obviously central bank independence is key for effectiveness. And these are territories that if you take too strong of a stance that risks losing that—could risk the losing the independence in the longer run. And I think it’s very important asset to make sure we keep it.

Now, in terms of climate change more specifically, obviously, it’s an important issue. I don’t mean to not take it seriously. But I am going to agree largely that it’s the government’s role. So the Turkish government put it in the medium-term plan. There’s lots of projects with the World Bank, there’s lots of World Bank financing, specific programs with the Ministry of Energy, Ministry of Treasury that they’re working on. But I don’t think, again, as the central bank, that we should be primarily involved in that discourse.

BESCHLOSS: I’m going to thank both of you for this incredibly insightful conversation. We’re at 1:30, so sadly—I know there are a lot of other questions—I’ll have to end this great conversation. But you have to tell me—so this week, are central bank governor is going to be talking about buying more gold? (Laughter.) Gold prices have been going up because a lot of central banks have been amassing gold as part of the reserves. So what’s your guess?

KGANYAGO: Well, let them—let them buy. We are feeling good. (Laughter.)

BESCHLOSS: Thank you very much. Let me thank Governor Karahan, Governor Kganyago. Thank you so much for this very, very lively conversation. And we look to future ones. Thank you. (Applause.)

KGANYAGO: Thank you.


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