The Turkish lira falls to a new low as new economic policies are formed

Why it matters

Wednesday’s fall in value was the largest since the lira crash in December 2021. Over the past two years, the lira has fallen 60 percent against the dollar; a lira is now worth only 4.3 cents.

Turkey’s $900 billion economy has taken a beating, and the declining currency is making everything the country imports — from medicines to crude oil — more expensive. It can also bankrupt businesses and households that have borrowed in dollars.

A change in the country’s economic policies could reverse an unsustainable and reckless course, according to several economists.

Background

Turkey has huge debts an inflation rate of just under 40 percent and a declining currency. Many analysts say the country’s economic problems have been exacerbated in recent years by Mr Erdogan. The president has repeatedly flouted conventional economic wisdom by claiming that high interest rates fuel inflation.

Most economists argue the opposite: higher interest rates make borrowing more expensive, slowing down investment and spending, which in turn curbs price increases. While such tightening slows inflation, it also threatens to trigger a recession, a major reason Erdogan has avoided the policy.

When central bankers resisted pressure to cut interest rates, Mr Erdogan fired them. The tactic undermined investor confidence in the central bank’s independence, further depreciating the lira’s value.

The central bank had sold its dollar reserves to artificially support the currency, but those reserves had plummeted. According to Goldman Sachs, “net foreign assets are in negative territory,” after accounting for liabilities.

Kadri Tastan, a senior fellow at the German Marshall Fund, a public policy think tank based 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, Tastan said.

What’s next?

While repeated falls in the lira have previously been a sign of investor confidence in Turkey’s economic path, the latest slump appears to be due to the government’s decision to stop defending the value of the currency by increasing foreign exchange reserves. to sell.

Because the previous exchange rate was the result of government manipulation, Tastan said, “we are likely to see the value of the Turkish lira fall further.”

But now, he said, the decline is “a sign of a return to more rational monetary policy”.