Amidst the socio-economic and climate crises, what better time to shed light on the question of a Turkish central bank that takes climate risks seriously. Economist Erinç Yeldan describes this as a “necessity” and in a wide-ranging interview with Green Central Banking, he explains that “central banks cannot shy away from the climate crisis, no matter what their mandates are”.
Yeldan is professor of economics at Kadir Has University and an executive director of the International Development Economics Associates. as well as a member-elect of the International Resource Panel of the UN Environment Programme.
His work encompassesa wide array of international topics including development macroeconomics and climate change, and with over two decades’ worth of research on Turkey’s economy and its central banking targets, Yeldan has gained a reputation as an expert on the Central Bank of the Republic of Turkey (CBRT).
Achieving price stability through green policies
Last month, Yelden published an article – co-authored with Burcu Ünüvar, head of economic research at the Industrial Development Bank of Turkey – which states the case for green central banking in the context of Turkey’s high inflation rates.
Citing projections from the Swiss Re Institute, Yeldan and Ünüvar explain in their paper that “the cost of climate action failure has the potential of triggering a fall of between 2.5 and 10.3% in GDP for Turkey”. In lieu of any action directed toward mitigating climate risks from the CBRT, Yeldan and Ünüvar found three reasons – two mandate-related and one climate policy-related – for the CBRT to green its operations. They conclude that “adopting a green monetary policy has the potential to improve the CBRT’s ability to reach its objective of price stability”.
Yeldan explains his motivation for writing the paper: “In pure economics language, the projections of output losses, the costs of slowing productivity, and the subsequent decrease in agricultural productivity will all lead to rapid rises in food and water prices. Thus even an orthodox central banker should be aware that it cannot control price stability with the singular mechanism that is policy interest rates. Therefore, greening central banks mandates and their policy tools is a must.”
Yeldan also underlines that green monetary policy is not “a matter of economic stabilisation, but of the survival of Turkey, humanity and biodiversity”.
The paper provides several policy options such as the “low-lying fruit” of climate-related stress tests and designing disclosure requirements. In addition, the authors suggest more comprehensive actions such as applying differentiated reserve requirement ratios to “design the loan composition of the financial system in a way to encourage greening of investment demand”.
Rejecting criticisms of “mission creep” when central banks consider climate policies, Yeldan and Ünüvar find that “evidence from Turkey, an emerging country with high inflation, supports the notion of greening its monetary authority, not only as a responsible role to undertake but also as a critical success factor in achieving its long-delayed price stability mandate”.
A return to ‘rational’ polices under high inflation?
Having won a tightly fought presidential election earlier this month, Recep Tayyip Erdoğan appointed Mehmet Şimşek as finance minister and former Goldman Sachs managing director Hafize Gaye Erkan as governor of the CBRT. Şimşek has pledged a return to “rational” policies after years of unconventional economic strategy which has sent the lira to record lows and has seen the CBRT to push interest rates up to 15% from 8%.
Food price inflation reached a high of 102% in November last year, and while that figure is now around 50% Yeldan explains that simply “resorting to orthodox interest rate hikes will not be sufficient to stabilise the economy”.
High inflation, Yeldan says, “is rooted in structural conflicts, structural bottlenecks that cannot be addressed by short-sighted monetary policies”. The main paradox of agricultural production is that “organic is costlier than industrial production methods, so the central bank and government must allocate credit to green industries, and green agriculture to stop the excessive use of fertilisers and promote climate-friendly practices”.
To address structural bottlenecks, such as the dependence of the domestic industry on foreign capital, “the CBRT must re-allocate its lines of credit which is unfortunately not on the agenda”. Yeldan also explains that “without solving the bottlenecks of loss in productivity, the efficiency of agriculture production, and the excessive import dependence on fossil-fuel-based industries, the pressures of high inflation will persist”.
High interest rates are ‘no silver bullet’
As previously outlined by Yeldan and Ünüvar, interest rates are a poor tool for climate mitigation, and hiking interest rates will likely lead to severe austerity measures and high unemployment. Regardless of how high interest rates are pushed in future, Yeldan cautions that “it is no silver bullet”.
Yeldan argues that the Turkish stabilisation package must be a balanced, expansionary fiscal policy that could come in the form of a wealth tax and carbon tax, which would have the double effect of reducing pollution while generating fiscal revenues.
Turkey was one of the last countries to ratify the Paris Agreement and aims for emissions to peak no later than 2038 and has pledged a net-zero target by 2053. Encouraging progress has been made, such as establishing a green economy and climate change department within the CTRD, as well as joining the Network for Greening the Financial System.
However, the current governmental setup has the Ministry of Environment sitting within the Ministry of Urban Affairs which, according to Yeldan, results in environment and climate action playing second fiddle to the priorities of urban construction. Despite being geographically well placed to exploit renewable energy, Turkey uses only an estimated 3% of its solar and 15% of its onshore wind potential which has been rated as critically insufficient by Climate Action Tracker.
The combined effects of low investment in renewable energy and natural vulnerabilities to droughts and heatwaves leaves Turkey susceptible to varying forms of climateflation, greenflation and fossilflation. “Considering that petroleum products and natural gas account for 85% of total energy use in Turkey, it is clear that fossilflation is more of a reality than a possibility,” Yeldan and Ünüvar stated in their recent paper.
Echoing similar comments from UN climate envoy Mark Carney, Yeldan stresses that “it’s not a matter of choice. Seen through purely economic eyes, climate action is a necessity”.
This page was last updated July 5, 2023
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