why it matters
Wednesday’s drop in value was the biggest since the lira crashed in December 2021. Over the past two years, the lira has lost 60 percent in value against the dollar; One lira is now only worth 4.3 cents.
Turkey’s $900 billion economy has taken a hit, and the falling currency makes everything imported into the country – from medicine to crude oil – more expensive. It could also push businesses and households that have borrowed in dollars into bankruptcy.
A change in the country’s economic policy could reverse what many economists argue has been an unsustainable and reckless course.
background
Turkey is grappling with huge debt, an inflation rate of less than 40 percent, and a falling currency. Many analysts say the country’s economic problems have been exacerbated by Mr. Erdogan in recent years. The president has repeatedly defied conventional economic wisdom by calling higher interest rates to fuel inflation.
Most economists argue the opposite: Higher interest rates make borrowing more expensive, which slows investment and spending and, in turn, restrains price growth. While such tightening slows inflation, it also carries the risk of triggering a recession, a key reason Mr Erdogan has avoided the policy.
When central bankers resisted pressure to lower interest rates, Mr. Erdogan fired them. The strategy undermined investor confidence in the independence of the central bank, causing the lira to fall further in value.
The central bank was selling its reserves of dollars to artificially prop up the currency, but those reserves were heavily depleted. According to Goldman Sachs, after accounting for liabilities, “net foreign assets are in negative territory”.
Kadri Tastan, a senior fellow at the German Marshall Fund, a public policy think tank in Brussels, said that for ordinary citizens, the exchange rate was one of the most visible signs of the economy’s health. That is why the government did everything it could to protect the value of the lira ahead of the presidential election, Mr. Tastan said.
What will happen next?
While repeated declines in the lira were a sign of investors’ faltering confidence in Turkey’s economic course, the latest slump appears to be the result of the government’s decision not to protect the currency’s value by selling foreign exchange reserves.
Because the previous exchange rate was the result of government manipulation, Mr. Tastan said, “Maybe we will see the value of the Turkish lira go down further.”
Although now, he said, the decline “signals a return to a more rational monetary policy.”
