Importance of the situation
On Wednesday, the lira experienced its biggest drop since its crash in December 2021. During the last two years, the lira has decreased by 60% against the dollar, with the value now standing at 4.3-cents for a lira. The $900 billion Turkish economy has suffered, and the falling currency drives up the cost of everything imported, from crude oil to medication. It can also push businesses and families who borrowed in dollars into bankruptcy.
Experts suggest that a shift in the country’s economic policy could reverse what they argue has been an unsustainable and haphazard course.
Background
Turkey has been facing enormous debts, an inflation rate of just below 40%, and a depreciating currency. Analysts believe that the country’s economic issues have been exacerbated in recent years by President Erdogan. The president has repeatedly disregarded conventional economic wisdom by maintaining that high interest rates cause inflation.
Most economists disagree: Higher interest rates make borrowing more expensive, decreasing investment and expenditure, subsequently reducing the price increase. While such measures may alleviate inflation, they also risk causing a recession, a significant reason why Erdogan has avoided the policy.
When central bankers refused to lower interest rates in response to pressure, Erdogan dismissed them. Investors’ confidence in the central bank’s independence was undermined as a result of this tactic, causing the currency’s value to fall even further.
The central bank had been selling off its dollar reserves to artificially prop up the currency, but these reserves had significantly diminished. After accounting for liabilities, Goldman Sachs reports that “net foreign assets are in negative territory.”
Kadri Tastan, a senior fellow at the German Marshall Fund, a public policy think tank located in Brussels, said that for ordinary citizens, the exchange rate is one of the most visible signs of the economy’s health. That is why the government did everything it could to protect the lira’s value before the presidential election, Mr. Tastan said.
What to Expect Next?
While previous drops in the lira were indications of investors’ faltering confidence in Turkey’s economic course, the recent slump appears to be the result of the government’s decision to stop defending the currency’s value by selling foreign exchange reserves. As the previous exchange rate was the result of government manipulation, Tastan believes “probably we will see the Turkish lira’s value go down further.”
Nevertheless, Tastan suggests that the current decline is “a sign of a return to a more rational monetary policy.”
