why it matters
Wednesday’s depreciation was the biggest since the lira crashed in December 2021. Over the past two years, the lira has fallen 60 percent against the dollar. Currently, 1 lira is worth only 4.3 cents.
Turkey’s $900 billion economy has been hit, with a depreciating currency making everything the country imports expensive, from medicines to crude oil. It could also drive businesses and households borrowed in dollars into bankruptcy.
A change in the country’s economic policy could reverse what some economists say is unsustainable and reckless.
Background
Turkey is plagued with massive debt, sub-40% inflation and a depreciating currency. Many analysts say Erdogan has exacerbated the country’s economic problems in recent years. The president has repeatedly defied conventional economic wisdom by arguing that high interest rates drive inflation.
Most economists argue the opposite. Higher interest rates increase the cost of borrowing, slowing investment and spending, and thus limiting inflation. While such tightening would slow inflation, it also risks triggering a recession, a key reason Erdogan avoids the policy.
Erdogan dismissed them after they resisted pressure to cut interest rates. The tactic undermined investor confidence in the independence of the central bank, further depreciating the lira.
Central banks had been selling dollar reserves to artificially prop up the currency, but those reserves were plummeting. According to Goldman Sachs, “net foreign assets are in negative territory” after recording debt.
Kadri Tastan, senior fellow at the German Marshall Foundation, a public policy think tank in Brussels, said the exchange rate is one of the most visible signs of economic health for the general public. That’s why the government did everything possible to protect the lira’s value before the presidential election, Tastan said.
what’s next?
While previous lira depreciation has been a sign of shaky investor confidence in Turkey’s economy, the latest decline is seen as the result of the government’s decision to no longer protect the lira’s value by selling its foreign exchange reserves. be done.
“The Turkish lira will probably depreciate further,” because the previous exchange rate was the result of government manipulation, Tastan said.
But now the fall is “a sign of a return to more rational monetary policy,” he said.
