The Turkish lira is losing value massively. This is mainly due to President Erdogan, who is deliberately accelerating the slide in money – with devastating consequences for the country.
The value of the Turkish lira has been falling for months – but this Tuesday the currency in Turkey literally collapsed. The trigger was statements by President Recep Tayyip Erdogan – once again.
It seems that the lira cannot be weak enough for Erdogan. In his opinion, their low value is good for the country and its economy. Low interest rates should stimulate loans and investments and strengthen exports, because foreign countries can then buy goods cheaply in Turkey. According to the president’s credo, the weaker the currency, the stronger the economic growth. And all the greater his chances of being re-elected in the year after next.
Turkish lira is losing value – goods in Turkey are becoming more expensive
But experts are now warning of the dangers of this massive political interference in currency issues. Her thesis: the political pressure on the central bank is undermining confidence in the economy of Turkey and thereby harming it. The depreciation of the lira has long been a controversial topic in the country. Because imports are becoming more expensive, as are oil and gas. Inflation is picking up, life in Turkey is getting more expensive.
But Erdogan is sticking to his policy of pushing the value of the lira further down every few weeks or even days. In his current speech, he called for a “competitive” lira, as he put it. An even weaker exchange rate should stimulate investment and promote jobs, he affirmed.
Lira collapses after the president’s speech
The lira’s reaction was prompt. The currency fell to record lows against the US dollar and the euro on Tuesday. Against the dollar, the daily losses were at times ten percent. In return, the dollar rose above twelve lira for the first time. The euro rate rose to 14.06 lira.
In the past few weeks, the currency of Turkey – politically wanted – had come under pressure again and again and fell steadily. In this month alone, the lira has lost around a quarter of its value against the dollar and the euro. On Monday Erdogan defended the recent drastic rate cuts and affirmed that he would win an “economic war of independence” despite his critics. Even after these words there had been a massive slide in the price.
President Erdogan wants to stimulate the economy by all means
Erdogan equates the weakness of the lira with economic growth. In fact, Turkey is currently achieving growth rates between an estimated six to nine percent – which is considerable in view of the global corona crisis. But growth is deceptive, unhealthy and bought very dearly, as many experts believe.
A good three years ago, the Nobel laureate in economics, Paul Krugman, warned that the Turkish economy could get into a “death spiral”. At the time, he considered it extremely dangerous for the country and its prosperity that the independence of the domestic central bank was being politically attacked so massively. It seems he was right in his warning.
Because the effects of the vicious circle of depreciating currency and rising inflation can now be felt all over the country, as you can read in numerous media reports. The prices for goods and energy are rising steadily and massively – it is already difficult to compensate for the increase in daily living costs for many citizens in the country. The cost of living is considered barely affordable for a large part of the population, and the inflation rate is among the highest in the world. Since many companies are also indebted in US dollars or euros, it is becoming increasingly difficult for them to repay loans.
Central bankers have to leave if they don’t cooperate
Erdogan recently ensured that central bankers whose monetary policy he disapproved of had to leave again and again. The current central bank chief Sahap Kavcioglu has been in office since March – he is the fourth head of the institution since 2019. His predecessors left office because they did not want to support Erdogan’s course of loose monetary policy.
Vice central bank chief Semih Tumen was also kicked out last month. However, he did not leave the current developments uncommented and called for an immediate return to a policy that protects the value of the lira. “This irrational experiment, which has no prospect of success, must be abandoned immediately and we must return to a quality policy that protects the value of the Turkish lira and the prosperity of the Turkish people,” Tumen tweeted.
But these are now unlikely wishes. Because the central bank does exactly what the president wants. Most recently, she lowered key interest rates last Thursday after Erdogan’s pressure. While the inflation rate is almost 20 percent, the key interest rate has been reduced to 15 percent. The lira also reacted to this with losses.
The international response to this rate cut was devastating. Bluebay Asset Management analyst Timothy Ash, for example, called the Fed’s decision “ridiculous”. It was “really dangerous for the lira and for Turkey,” the AFP news agency quoted the expert as saying.
The next rate cut is likely to be in the coming month
It was also the third rate cut in less than two months. The next one is likely to follow in December, as was already promised. Erdogan takes the view, contrary to the current doctrine, that it is in reality high interest rates that fuel inflation.
It is also unlikely that the central bank will withstand pressure from the president because there is now open demand that its independence end once and for all. “Independent institutions cannot stand above the will of the people,” said Devlet Bahceli, head of the nationalist party MHP, which is part of Erdogan’s government. “Turkey should be free from the interest burden.” He also demanded that Turkey oppose the International Monetary Fund and the “interest rate lobby”.
These statements are also likely to weaken confidence in the lira and the Turkish economy. The “death spiral should only turn faster in the future.
Sources: “Handelsblatt.com “, “The mirror“,”Tagesschau.de“, Statista.de / with material from dpa and AFP
You can see in the video: Inflation is picking up not only in the USA, but also in Germany. What does that mean for our investments? Financial expert Joachim Schallmayer has tips for investors and an inflation forecast.