Turkish Lira hits another low, why is it losing value?

On Monday, the Turkish Lira fell to new lows against the US dollar as President Tayyip Erdogan doubled down on his orthodox low-interest-rate policy by citing the Islamic usury doctrine.

Under Erdogan’s pressure, the central bank cut key interest rates from 19 to 15 percent in September, causing the Lira to plummet. It has further reduced interest rates from 15% to 14%.

At 11:51 a.m. ET, the Lira was trading at a new low of 18.04 to the US dollar, down from a close of 16.4790 on Friday. The currency, which has already lost more than half of its value this year, fell 9.93% and reached a record low of 18.04 against the US dollar.

On Sunday, Erdogan defended his economic policy, saying currency volatility should be viewed as an attack on the country’s economy, assuring that inflation, which has reached 21.3 percent, will fall back to single digits.

The currency plummeted to a new record low of 13.4035 against the euro.

Why is the Turkish Lira crashing? 

Turkey is currently experiencing a currency crisis as the Lira has fallen to record lows against the US dollar, losing nearly 30% of its value in the last month alone and more than 43% since the beginning of the year. The unconventional economic policies of Turkish President Recep Tayyip Erdogan have been blamed for the country’s currency crisis.

The Lira has been depreciating for an even more extended period. In 2014, it cost two Liras to buy one US dollar, and today, it costs more than 13 Liras to purchase a US dollar.

The currency’s value is affected by demand.

However, as the Turkish central bank becomes more erratic in regulating the supply of Lira, the Lira’s exchange value has become increasingly volatile. As a result, foreign investors have become hesitant to purchase Liras to invest in Turkey, causing the currency’s demand to fall.

The value of any currency or good is also determined by its scarcity compared to other things. According to World Bank data, Turkey’s broad money supply increased roughly three and a half times between 2014 and 2020, while the United States’ broad money supply increased approximately 50% during the same period. Not surprisingly, this has caused the Turkish Lira’s value to fall against the US dollar.

Is Erdogan’s Economic Policy depreciating the Lira? 

Despite widespread criticism from economists and opposition lawmakers, Erdogan’s new economic plan prioritizes exports and lending. Budgets in Turkey have been severely eroded as inflation has skyrocketed.

Turkish President Erdogan has advocated for low borrowing costs in order to stimulate the economy, boost growth and exports, and create jobs. Mr. Erdogan has vowed to break the cycle of an economy that is reliant on short-term hot money drawn in by high-interest rates.

According to economists, raising borrowing costs reduces inflation, which has surged globally as the economy recovers from the coronavirus pandemic but is particularly acute in Turkey due to the government’s unconventional policies.

The opposition Future Party’s economic policy director, Kerim Rota, said the Lira was experiencing the worst monthly devaluation since the year 1994 and the second-worst in the previous 40 years.

“It will be the highest if it reaches 14.25 to the dollar by the end of the month. It’s now obvious that things have gotten out of hand, “Rota told the local press.

Erdogan, a devout Muslim whose religion considers usury a sin, has described interest rates as the mother and father of all evil.

His administration also believes that low-interest rates will reduce inflation by stimulating growth, which in return will increase the supply of goods. Hence, according to Mr. Erdogan’s logic, a central bank can print unlimited amounts of currency while still avoiding hyperinflation by stimulating growth sufficiently.

The Turkish President refuses to accept blame for the Lira’s depreciation and has replaced three central bank governors in the last two years because they have refused to lower interest rates.

“I reject policies that will condemn our people to unemployment, hunger, and poverty,” the Turkish President said, warning that the country was in a “war of economic independence.”

What lies ahead? 

Lower interest rates are likely to increase the supply of Liras on the market, causing the currency’s value to fall further.

While many people believe Turkey’s banking sector has improved since the 2001 economic crisis. Jason Turvey emerging markets analyst of Capital Economics is concerned about the impact on banks and the possibility of controlling capital.

“Banks are better placed to cope with the spillovers from a weaker lira than they were a few years ago,” Tuvey told AFP.

“The risk is that the Lira suffers further sharp and disorderly falls that do trigger problems in the banking sector. A credit crunch could ensue that weighs heavily on economic activity.”

“Any signs of a ‘flood of withdrawal requests’ from foreign exchange deposits would likely trigger more aggressive capital controls,” he warned.

The majority of Turkish banks deposits are in foreign reserves, primarily dollars. The country’s official inflation target is 5%, but it has stubbornly remained in the double digits over the last two years, approaching 20% last month.

Opposition parties claim that real inflation is much higher than the official figures.

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