The Crisis of the Turkish Lira is a direct consequence of the crisis of the Turkish Economy. The fall of Turkey’s national currency continues. In 2016 and specifically before the effort to established a coup in Turkey, the Turkish lira and $USD exchange rate was at USDTRY: 2,93 (June 10, 2016) while last week it reached USDTRY: 7.39696 (August 16,2020), a rate that never existed before.
The fall in the Turkish lira did not come abruptly. Turkey’s grandiose plans and open low-power and proxy wars that require long-term financing are one of the reasons, but the real reasons are mainly economic and secondary geopolitical. The Turks supported the growth of their economy by credit expansion mainly through foreign currency borrowing.
by Thanos S. Chonthrogiannis
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The big growth rate of the economy over time also creates resilient inflation. In this case, borrowing rates must be raised in order to reduce the growth rate of the economy and to keep inflation rising so that the whole system of the economy stabilises at a new equilibrium point that feeds the lowest growth rates while keeping inflation stable at lower levels.
The problems for Turkey began when the Erdoganomics began to apply, which because of the Islamic religion that feeds as a pillar the neo-Ottoman dreams and plans of the President of Turkey, considers borrowing rates to be the “Beast” and the source of evil.
Since Erdoganomics do not allow the Central Bank of Turkey to implement an independent monetary policy which in this case would have to raise lending rates, which in turn would cause dominoes of corporate and business bankruptcies which would translate into heavy political costs for the Turkish government, the Central Bank began to reduce interest rates.
In this case the markets intervene by selling Turkish Lira and buying foreign currency ($) by getting out of the Turkish economy causing the Turkish currency to depreciate due to low interest rates.
Erdoganomics stipulates that the President of Turkey is stronger than the markets and to stop markets devaluing Turkey’s national currency used all available reserves in US dollars held by the Central Bank of Turkey, all dollar reserves of the Turkish commercial banks and those available reserves in US dollars held by Qatar. The aim was to intervene in the markets to contain the fall in the Turkish lira’s exchange rate with the US dollar.
Despite high annual inflation rate in the Turkish economy of order 12%, the Central Bank of Turkey has cut its borrowing rates several times to boost the economy. That is what has been going on for the last three years.
At the same time, the Central Bank of Turkey, in cooperation with the other commercial state-owned Turkish banks, has tried over the past two months to keep the Turkish lira’s exchange rate with the US dollar at high levels. Particularly, USDTRY: 6.85, throwing tens of billions of US dollars from its reserves into the system.
The Turkish government reacted with restrictions on lending to companies. Even the imposition of capital controls on commercial Turkish banks will only be able to offer a delay not to solve the problem.
Markets predict that the Turkish lira’s exchange rate with the USD will exceed 9 in the next one to two months and until the IMF enters in Turkey or national elections are held in Turkey to change the direction of the USDTRY exchange rate.
The other problem of the Turkish economy is the chronic current account deficit. Turkey imports more than it exports, so the Turkish lira is under pressure from a second source. Turkey’s imports structure shows that the Turkish economy is deeply dependent on raw materials such as oil and gas.
A country whose economy wants to rely on exports has a big problem when its national currency is undervalued, and since the raw materials imported for its industry are paid in hard currency such as $, €, €, £, then in this case the cost of raw materials is transferred to the price of the product making it uncompetitive or largely neutralising the advantage offered by the devalued national currency.
At the same time, the devaluation of the national currency in addition to imports of raw materials also affects consumer goods markets, making them increasingly expensive. This is mirrored in the trade deficit showing that the devalued currency does not help the economy.
It should be noted that the nominal prices of the exchange rate of the Turkish Lira with the USD and other foreign currencies e.g. USDTRY: 7,39696:1 concern face value and internal transactions, not the wealth produced by a country. If this were not true, then i.e. the ¥/$ exchange rate would show us that Japan is a weaker economy than the Turkish economy, which of course is not the case.
In 2009 Turkey issued the new Turkish Lira, deducting three zeros from its face value. This does not, of course, change the true value of a currency.
At the same time , the EU is considering imposing sanctions on Turkey to discourage Turkey from participating in other regional wars in which it indirectly participates in order to secure rights to extract oil and gas from countries such as Libya, Syria, Azerbaijan, etc. In the event of EU sanctions, Turkey’s national currency will be further devalued.
