The Turkish Lira currency crisis explained

Without a doubt the last 15 or so years have been a rough time for all the major economies of the world. From the Global Recession to COVID-19, it’s been a rollercoaster of a ride. Turkey however has had one of the most turbulent times of all.

For a long time, Turkey has been a rising star in world economics. It was listed as one of the ‘MINT’ countries (Mexico, Indonesia, Nigeria and Turkey), part of a group of key economies for growth and development, future powerhouses in the global economy. The country weathered the 2009 crash well and returned to growth in a very short period. All signs indicated the Turkish economy was on course to continue its immense growth path.

This all changed in 2018. Since then, the country has been overwhelmed by a vast currency crisis that has seen inflation skyrocket and the Turkish Lira collapse in value. In January 2018, £1 was worth around 5 lira. Today it’s worth over 15 lira, a historic low.

Below we’ll look at the two main factors that created and exacerbated this dramatic situation.

(Turkey is being ravaged by inflation)

A highly unorthodox economic policy…

The Turkish economy is built on foreign investment, growing government borrowing and a construction and development boom.

When the crisis started in 2018, the country introduced an economic policy that goes against all economic logic.

Conventional economic wisdom suggests that in times of high inflation, interest rates need to be raised to counter its effect, however Turkey has continued to slash interest rates even as the Lira spirals on an ever further path of loosing value.

The crisis is made worse because so much of Turkey’s debt is in foreign currency. As the Lira looses value, the cost of servicing the debt goes up, creating a continuing vicious cycle.

COVID-19 also hit Turkey’s economy particularly hard. Millions of tourists visit Turkey every year, spending money and swapping foreign currency for Lira. With the collapse in tourism, many in Turkey’s coastal regions were left at a loss.

With continuing inflation, ordinary people have taken to buying foreign currency as a means of security for their savings thus further heightening the currency issues.

People in Turkey today are poorer, the cost of living has sky rocketed and citizens living below the poverty line has increased. Despite this, the policy of growth at all costs continues to be in place and government borrowing continues.

Much of the situation can be understood when the political context is taken into account.

The slide into political authoritarianism…

Since coming into power around 20 years ago, Recep Erdogan has consolidated his hold on power by eroding democratic norms, amending the constitution to give him more power and weakening non presidential government institutions.

The policy of low interest rates is dictated from the president himself. He has forced out previous dissenters from the Central Bank and bought it under the de facto control of the Presidency.

In foreign policy, he has antagonised former allies, many of whose domestic companies have contributed significantly to Turkey’s growth leading to dramatic losses in confidence.

Each time the President takes an erratic economic or non-democratic action, the Lira loses more in value.

What’s clear is that Turkey needs a change, either in policy or in administration. The current economic policy is continuing to fuel an economic and currency crisis that shows no sign of getting better.

Sources: https://data.worldbank.org/country/turkey

(The President remains popular despite becoming more authoritarian)

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