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Explained: Why Turkey's Currency Is Crashing; Can Ankara's First Woman Central Bank Governor Work Magic?
The Turkish lira, in June, weakened by around 20% against the dollar since the start of the year. It has raised fears of even higher prices for people already struggling to afford basics like housing and food amid high inflation. Here’s a look at the falling value of the Turkish currency, what lies ahead for the economy and how people have been affected
Updated Jun 12, 2023 | 08:03 AM IST
Turkish President Recep Tayyip Erdogan (C) visits the Anitkabir, the mausoleum of Mustafa Kemal Ataturk.
Photo : AP
The longtime leader appointed an internationally respected former banker as finance and treasury minister and on Friday named a former co-CEO of a US-based bank as head of Turkey's central bank.
But lingering uncertainty over Erdogan’s economic direction and an apparent move to loosen government controls of foreign currency exchanges have led Turkey's currency to plunge to record lows against the US dollar earlier this month.
The Turkish lira (currency), in June, weakened by around 20% against the dollar since the start of the year. It has raised fears of even higher prices for people already struggling to afford basics like housing and food amid high inflation.
Here’s a look at the falling value of the Turkish currency, what lies ahead for the economy and how people have been affected:
Turkey's crisis and Erdogan's economic policies
Turkey has been plagued by a currency crisis and skyrocketing inflation since 2021, which economists say are the result of Erdogan’s unorthodox belief that raising interest rates will increase inflation.
Erdogan has exerted pressure on Turkey’s central bank to lower borrowing costs.
The bank has cut its key policy rate from around 19% in 2021 to 8.5% now, even as inflation hit a staggering 85% last year. Inflation eased to 39.5% last month, according to official figures, but an independent group says the true number is more than double that.
In other policies considered to be unorthodox, economists say the government aggressively intervened in the markets to prop up the lira ahead of the elections, depleting Turkey’s foreign currency reserves to keep the exchange rate under control.
Why is Turkey's currency falling?
The Turkish lira tumbled to record lows against the dollar in the first week of June. Economists say the sharp slide resulted from the government loosening its controls over the currency following Simsek's appointment. However, the plunge may have been steeper than what it had anticipated.
“Loose interventions, combined with some uncertainty, created an excessive depreciation in the lira in one day,” Sengul said about the Wednesday drop. “The banks are currently intervening in the exchange market, that’s why we will not have another 7% depreciation,” an expert told the Associated Press.
How are the people of Turkey affected?
High inflation is pinching households and businesses with costlier groceries, rents, utility bills and more. A weaker currency means Turkey, which is dependent on imported raw materials, will have to pay more for everything from energy to grain that is priced in dollars.
Post-poll economic changes ahead?
Hours after being sworn in, Erdogan announced that Mehmet Simsek, a former Merrill Lynch banker who had previously served as his finance minister and deputy prime minister, would return to the Cabinet after a five-year break from politics.
Simsek said Turkey had no other option but to return to “rational ground." In a sign that Erdogan’s new administration might pursue more conventional economic policies, Simsek also said there were no “shortcuts or quick fixes” but vowed to oversee Turkey’s finances with “transparency, consistency, accountability and predictability.”
In another sign, Erdogan on Friday appointed Hafize Gaye Erkan to lead the central bank, taking over from the current chief who has championed rate cuts since 2021. Erkan, a former co-CEO of a US-based bank, becomes Turkey's first woman central bank governor.
End of Article
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