Why is the Turkish Lira collapsing and what is the impact of the currency crisis in Turkey?

Turkey besieged currency has plunged to historic lows against the US dollar and the euro in recent months as President Recep Tayyip Erdogan continues a widely criticized effort to cut interest rates despite soaring consumer prices.

As a result, families are struggling to buy food and other goods, and the Turkish lira has lost around 40% of its value since the start of the year, becoming one of the worst performing currencies in the world.

Here’s a closer look at Turkey’s currency crisis and its impact on a country with skyrocketing inflation.

What’s going on with the Turkish lira?

The Central Bank of Turkey has reduced borrowing costs by four percentage points since September, in line with Erdogan’s wishes, even though inflation has accelerated to around 20%.

Erdogan, who has been in power for about 19 years and has grown increasingly authoritarian, has long argued that high interest rates cause inflation, contrary to what economists generally say: that rising rates will lower. the costs.

The rate cuts have raised concerns about the bank’s independence, while the country’s unconventional monetary policy has frightened foreign investors, who are dumping Turkish assets. And Turkish citizens are rushing to convert their savings into foreign currencies and gold to protect themselves from soaring inflation.

“People bring their savings and always want to buy dollars. When will this end, where will it go? They are panicking,” said Hulya Orak, an employee of the bureau de change. “People are constantly in panic mode and using the money that is under their mattresses.”

As a result, the Turkish lira, which had barely recovered from a currency crisis in 2018, weakened to record lows against the dollar and the euro.

It crashed at an all-time high of 13.44 against the US currency on November 23 after Erdogan insisted there would be no turning back to his unconventional policies. On Tuesday, the pound fell again to an all-time low of 14 against the dollar after Erdogan reiterated cuts will continue and amid signs the US Federal Reserve will tighten consumer and business credit as as inflation increases.

The pound rallied slightly on Wednesday after the Central Bank of Turkey announced it was intervening in the forex market to stem volatility.

How have people been affected?

With inflation exceeding 21%, according to government figures released on Friday, commodity prices have skyrocketed and many people in the country of over 83 million are struggling to make ends meet. The independent inflation research group, made up of academics and former government officials, puts the inflation rate at 50 percent.

The devalued pound drives up prices, making imports, fuel and consumer goods more expensive in Turkey, which depends on imported raw materials. Meanwhile, rents have skyrocketed and home sales prices, mostly pegged to the dollar, are rising.

Every morning long queues form outside kiosks selling bread a pound cheaper than in bakeries and shops.

“We’re reducing everything,” Sinasi Yukselen said as he stood in line. “I used to buy 10 loaves of bread, now I buy five. We have given up buying meat.”

At a mall selling discount goods in Ankara, Emine Cengizer said she wanted to buy a winter coat for her teenage daughter, but left empty-handed.

“If I buy the coat, we won’t have anything to eat for the rest of the week,” she said.

Selva Demiralp, professor of economics at Istanbul Koc University, says she is concerned about a possible brain drain.

“When your wage gap between what you can earn in Turkey and what you can earn abroad widens so much, it will be very difficult for us to keep these highly educated white-collar workers at home,” she said. . “And that’s it, it’s a major threat to the future of the country.”

What is Erdogan’s economic policy?

The Turkish president has pushed for low borrowing costs to stimulate the economy, boost growth and exports, and create jobs. He pledged to break the cycle of an economy dependent on short-term “hot money” attracted by high interest rates.

Economists say rising borrowing costs are dampening inflation, which has risen around the world as the economy recovers from the coronavirus pandemic, but is particularly acute in Turkey due to the country’s unorthodox policies. government.

A devout Muslim, whose religion considers usury to be a sin, Erdogan described interest rates as “the mother and father of all evil.” He sacked three central bank governors who opposed a rate cut. In another shake up, Erdogan on Thursday appointed a new finance minister seen as supportive of pushing low lending rates down, causing the pound to drop slightly.

“With the new economic model, we are pushing back the policy of attracting money with high interest rates. We are supporting production and exports with low interest,” Erdogan said this week.

The Turkish leader blamed the currency crash on foreign forces determined to destroy the Turkish economy and said his government was waging “an economic war of independence”.

Demiralp, the economist, says the government is doing the opposite of what is normally done to keep prices down.

“The central bank claims that by cutting interest rates it will contain inflationary pressures. The markets don’t buy this story,” she said.

Turkey is focusing on growing the economy rather than controlling inflation, Demiralp said, “but I think even growth is very questionable at this point because you’re going to see more contraction coming due. panic and uncertainty and escalating costs that come with it. crisis. “

What is the political impact for Erdogan?

His first years in power were marked by a strong economy that helped him win several elections. Recently, soaring consumer prices have hurt its popularity, with opinion polls indicating unease with its economic policies, even among its supporters.

Police broke up small protests in Istanbul and several other Turkish cities last week by groups protesting the high cost of living. Dozens of people were arrested.

An alliance of opposition parties that have formed a bloc against Erdogan’s ruling party and his allies has climbed in the polls. Members of the opposition coalition are calling for early elections and accusing Erdogan of “betrayal” for mismanagement of the economy.

Erdogan declined to call an early election, insisting the vote will take place as scheduled in 2023.

He said this week that the government is working on programs that would create 50,000 new jobs and that it should raise the minimum wage.

“We are preparing to take, one by one, measures to comfort the citizens whose purchasing power has declined,” Erdogan said.

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