The Turkish lira entered a “new station” very similar to the one that it experienced in December 2021. Six months ago, its exchange rate fell against one US dollar to the limit of 18, while today, this number touched by simple strides, as it recorded, on Wednesday morning, the price of 17.16 According to the Turkish “Dovız” website, which specializes in monitoring exchange rates.
The new decline of the lira comes now, in light of official data indicating that the annual inflation in the country jumped to its highest level in 24 years, recording 73.5 percent from May, driven by the repercussions of the war in Ukraine, high energy prices, and other negative repercussions.
With this historical level of inflation, Turkish citizens are touching its repercussions on “the prices of everything”, starting with daily consumption of foodstuffs, to other items, such as cars, and even fuel, whose prices change on a weekly basis.
At a time when the lira exchange rate crossed the 17 barrier, on Wednesday, the price of a gram of gold exceeded the 1000 Turkish lira barrier, despite the horizontal path of gold prices in global markets, in light of economists’ expectations that this cycle will continue to decline to record levels in the coming days.
The Turkish government does not see what the country is experiencing as an “inflation crisis,” but rather as a “high cost of living,” according to what Turkish President Recep Tayyip Erdogan referred to in statements a few days ago.
Erdogan stressed his policy of not raising the interest rate, as a step to achieve “greater growth rates in the country” and to increase exports.
What happened in December?
Six months ago, the value of the Turkish lira deteriorated to “record levels”, exceeding the 18 barrier against one US dollar, at a time when the Central Bank moved to cut interest rates.
This prompted the Turkish government to launch a “new financial instrument” that allows achieving the same level of potential profits for savings in foreign currencies, by keeping assets in lira.
At the time, Erdogan said, “We will provide a new financial alternative for our citizens who want to allay their fears caused by the high exchange rates. From now on, there will be no need for our citizens to transfer their savings from the lira to foreign currencies, for fear of higher exchange rates.”
Soon, Erdogan’s words were directly reflected in the currency exchange market, at that time, and the lira exchange rate witnessed a revival, falling to the level of 11.08 against the dollar.
However, with the beginning of the new year, the price fell again to reach the 13th barrier, while it ranged during the months of March, April and May between the 14 and 14.60 mark.
“The Turkish lira is at its lowest level, and there is no place to fall yet, and citizens can rest,” Treasury and Finance Minister Noureddine Nebti said in a statement in March.
But from the end of May to June, there was a different scene, as the exchange rate declined, surpassing the 16 mark, reaching the last stop on June 6 at 17.16.
The exchange rate of the lira has become the main concern inside Turkey, while inflation is one of the biggest problems in the economy in the country.
So far, the benefits that resulted from the launch of the latest financial instrument by the Turkish government are not known, while recent statistics indicate that significant levels of exports have been achieved, compared to the previous months.
Earlier this week, Turkish Trade Minister Mehmet Muş announced a 15.2 percent increase in his country’s exports last May, compared to the same month last year, stressing “their continuation of the path to achieve the goal set by the Turkish President to gain 250 billion dollars in exports by the end of 2022.”
The scenario is repeated.
Professor of Financial Management at Basaksehir University, Dr. Firas Shabo, says that the new decline in the lira exchange rate is mainly related to Erdogan’s recent statements, in which he emphasized the policy of not raising the interest rate.
Shabo added to Al-Hurra: “This matter had an impact, in addition to the statements of officials and statements of Turkish institutions about the new inflation rates.”
“There is a negative atmosphere in general, and the December series is repeated.”
The doctor in economics points to other main reasons behind the new deterioration, including “the value of the dollar globally, and the Russian-Ukrainian conflict, which negatively affected the currencies of emerging countries, especially Turkey.”
Shabo explains that “energy prices have put a huge burden on the Turkish lira, especially since the Turkish economy depends on Russian gas. The whole atmosphere is negatively reflected. And the series is being repeated again.”
In turn, the economic journalist, Saadi Ozdemir, identified 3 reasons behind the new deterioration in the value of the Turkish lira, and the high rates of inflation.
The first of these reasons is “the first wave of global price increases resulting from the deterioration of the trade balance and production due to the epidemic.”
The second reason is related to the transformation of “the political will in Turkey to a low interest policy independent of the exchange rate and inflation, in the hope that the current account balance will be achieved permanently, leading to a rise in the exchange rate and prices.”
In addition, Özdemir points to another reason, which is “the record rise in energy, food and commodity prices with the Russian invasion of Ukraine. This doubled the Turkish energy bill.”
“The Lira Between Two Looks”
For two years, Erdogan has been insisting on the rate cut path, in a policy that was enough to dismiss four central bank governors, and finally two deputies to the current governor, Shihab Kavcioglu.
Erdogan, a supporter of strong growth backed by low-cost loans, has long been opposed to high interest rates, which he frequently describes as “the root of all evil”, stressing that they “encourage inflation”.
However, on the other hand, the Turkish street, especially those who oppose it, view this policy as a “challenge” and that it reinforces the failure of the Central Bank to remain as an independent institution. It is also what economists point out.
The track on the Turkish lira and the Turkish economy in general is considered one of the most important pillars that will determine the outcome of the upcoming presidential elections, which are scheduled to be organized in June 2023.
There is only one year left for this maturity, amid uncertainty surrounding what the next 12 months will be.
“With today’s exchange rates, official CPI inflation in June will be at least 82 percent,” Hakan Kara, an academic economist, faculty member at Bilkent University, and former chief economist at the Central Bank of Turkey wrote on Twitter.
“If action is not taken, we can see three numbers in the last quarter,” he added.
While the Turkish economic academic, Atila Yeşilada, said: “The central bank must intervene tonight, or December 2021 may happen again.”
Politically, Vice President of the Republican People’s Party, Veli Agbaba, wrote on Twitter, Wednesday: “200 Turkish liras (the largest denomination in circulation), which was $133 when it was first issued, is now $11, and if it continues like this, it will It drops to less than $10.”
But Finance Minister Nureddin Nebéti noted that “the cash balance of the treasury (the main indicator of budget results) recorded a surplus of 149.2 billion Turkish liras in the month of May.”
“In particular, as a result of the positive performance in budget revenues, the cash surplus in the January-May period amounted to 82.4 billion Turkish liras,” he added, according to what was reported by Turkish media on Wednesday.
“These results are a tangible indication of the fiscal discipline that we are applying. We will continue to resolutely maintain our firm position in public finances,” Nabate said.
“six reasons”
Meanwhile, the Turkish expert and businessman, Alaeddin Şenköler, sees more than one reason for the rise in inflation and the depreciation of the lira against hard currencies.
Schenkoler reviewed these reasons in an interview with Al-Hurra website, saying that the first of them is “affected by the continuous high prices of food and raw materials all over the world, in addition to being affected by the rise in fuel prices globally.”
There are other reasons, such as “being affected by the repercussions of the Russian-Ukrainian war, as Turkey is next to the two countries, and being affected by the negative results of the Corona pandemic, like the rest of the world.”
“Turkey is also targeted by some countries in Europe and the United States with unnamed hostility indirectly,” according to Schenköler, according to his point of view.
However, he points out that what is happening financially and economically in the country is linked to “the wrong decisions of the Turkish government, especially the President of the Republic in managing the country’s economy, with the world emerging from the Corona crisis.”
Over the past months, “the heads of the Central Bank and the finance ministers have been changed more than once, and this has led to instability in the implementation of the planned economic curricula for a stated period of time.”
This also led to “the loss of confidence of the Turkish citizen towards the government to get out of the financial crisis,” according to the economist.
He expects that “Turkey’s economy will continue to be affected by the negative reality, for a maximum of 24 months, and then return with the world to its usual normal course.”
“It may be more affected by the upcoming elections,” the expert added, “I hope that the (ruling) Justice and Development Party will not have to pay a heavy price as a result of the elections so as not to waste its great achievements 20 years ago.”