The collapse of the Turkish lira very quickly .. What are the reasons? Will its decline continue?

The Turkish lira is losing half its value this year, with the continuation of the financial policies that led to this collapse, foremost of which is the reduction in interest rates, and in light of the increase in inflation. What is the future of the Turkish currency and economy?

  • Inflation rate in Turkey exceeded the level of 21%

During the year 2021, the Turkish lira lost about 50% of its value, reaching an unprecedented level.

At some point in Friday’s trading, the Turkish currency fell by 8%. To approach 17 pounds to the dollarThe Istanbul Stock Exchange also announced the suspension of trading in it, after the collapse of the Turkish currency to the level of 16.8 lira per dollar, which is a record low, and it comes due to inflationary pressures andinterest-cutting efforts.

To further understand the deterioration of the Turkish currency, its value reached 7.43 lira to the dollar on the first days of this year.

What is behind this resounding fall?

The heavy losses of the lira come this year, in light of Inflation rising rapidly. The inflation rate exceeded the level of 21%, in the country of 84 million people, in light of Turkish President Recep Tayyip Erdogan refused to raise interest rates, a measure that economists believe would contain the rise in prices, which naturally leads to the erosion of the purchasing power of the local currency.

وتوقّعت Moody’s The credit rating indicates that inflation in Turkey will exceed 25% next year, and will harm the country’s economic growth.

Yesterday, the Turkish Central Bank decided to cut the key interest rate to 14%, from 15%, which prompted the local currency to decline rapidly to a new record low. This was followed by a decision to raise the minimum wage by 50% to relieve some pressure on citizens.

exceptional policy

President Erdogan argues that higher interest rates are what increases inflation, while lower rates will dampen inflation, a belief that contrasts with what economies around the world have experienced throughout history, according to a report by the Wall Street Journal.

Erdogan has fired nearly every economic official who opposed these policies, including officials in the Ministry of Finance and the Central Bank, and there is little sign that he will change his mind, while investors and economists have urged Erdogan to reverse course, according to CNBC.

Erdogan also says that the depreciation of the lira was the result of “plots” against the country and not because of economic policy, noting that his country took a “risky but right” path by cutting interest rates despite the lira’s sharp decline.

How have these policies affected?

According to the Wall Street Journal, the policy of cutting interest rates has led to a collapse in the value of the lira, which has largely become one of the worst investments in the world this year.

When interest rates are below the rate of inflation, businessmen, consumers and foreign investors are concerned, because this means purchasing power is eroded.

Worse, a rapidly weakening currency can create a deadly inflationary spiral, as it raises the cost of key imports such as food and energy.

Looking at the current situation, inflation in Turkey grew by exactly 21.3% in the last month, compared to a year ago, and this level is 7.3 percentage points more than the interest rate announced on Thursday.

That is, the real interest rate (the difference between the rates of inflation and interest) is (-7.3%), which means that the money invested in banks is being eroded by low interest, which cannot compensate for the rise in prices.

Worrying weaknesses

When the Turkish lira came under pressure in 2020, the Turkish Central Bank was able to manage its depreciation by borrowing foreign currency from local banks and other entities, and selling that money in the market to buy the lira. This has depleted the foreign currency that Turkey has in its vaults, as Turkey’s central bank is estimated to have more liabilities than assets, according to the Wall Street Journal report.

Some observers fear that the weak link in the current currency crisis is the Turkish banking sector, which, as of last September, owed $83 billion abroad, which is due for repayment in the next 12 months, according to Turkish Central Bank data.

Historically, banks were able to roll over such loans with foreign creditors, meaning they didn’t have to use their foreign exchange reserves, but now economists are looking to see if foreign lenders will allow Turkish banks to roll over the next big batch of loans due in the spring.

Another major concern is citizens’ abandonment of the lira, with nearly 60% of bank deposits now in foreign currencies, according to Capital Economics data.

It should be noted that the sudden increase in dollar withdrawals from banks will force them to consume their foreign exchange reserves, unless the government intervenes and imposes capital controls that limit citizens’ ability to withdraw foreign currencies.

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