A Two-Year Rollercoaster: The Lira
Grace Watt, Staff Writer
October 17th, 2019
Spiral of Turkish bank notes
Turkey has acted on their threats and launched an air and ground offensive against US-backed Kurdish forces on October 9th, fueling tensions with the US and weakening foreign investors’ confidence in the lira. The currency has seen a noticeable dip in strength, however that has been par for the course recently. The lira has already been on a rocky path for the past two years. The weakening of the currency mostly comes from increasing inflation, large amounts of foreign denominated debt and an unorthodox approach to economic policies by President Erdogan.
In 2018 alone, the lira experienced approximately a 40% drop against the USD, sending Turkey towards financial instability and leaving shockwaves through other currencies around the world, including Argentina and South Africa. Turkey experienced a surge of inflation, reaching just over 25% in October of 2018, and soon thereafter experiencing spiked interest rates of up to 24%. The increased interest rates were courtesy of the central bank, in an attempt to lower inflation and strengthen the lira. However, President Erdogan was very outspoken in his disagreement with their monetary policy. He recommended that the central bank lower interest rates in order to, in theory, boost economic growth and appear more attractive to foreign investors. While the President has control over forming policy within his government, the central bank of a country is typically distinguished by its separation from politics and by independent free reign over implementing monetary policy that is deemed in the country’s best interest. After the central bank refused to follow Erdogan’s recommendations, the president proceeded to fire the head of the central bank in July of 2019, which is a red flag for many to signal a demise for democracy in Turkey. Turkey is indebted by over 53% of their income, which is hundreds of billions of USD, and is also running a large current account deficit. This means Turkey is importing more goods and services than they are exporting and are relying on external resources to provide for themselves.
The weakening of the lira is mainly due to a combination of poor monetary policy and budgeting on Turkey’s part. While Turkey has experienced its own inner turmoil, this crisis has also led to several international conflicts with several countries that Turkey is indebted.
The US and Turkey have had a historically complex relationship, which recently has been on a deteriorating trajectory, complicated by the fact that Turkey is USD$17 billion indebted to the US. The NATO allies’ agendas often conflict, and the Trump administration in particular have experienced a fair share of contentious conflicts with Turkey. However, tensions escalated when Trump ordered aluminum and steel tariffs in August of 2018. At the same time that these tariffs were ordered, halfway across the world, the Turkish central bank delivered a speech meant to reassure citizens that their economy was finding its footing again. Needless to say, the lira dropped down to the lowest in a decade that afternoon. US-Turkey relations have remained less than amicable, with one of President Trump’s most recent tweets saying he could “destroy and obliterate the Economy of Turkey”. This sent worry that a wave of detrimental sanctions would be aimed straight for Turkey, however, there seems to be little plans to follow through on these drastic threats at the moment. Feuding with one of the largest and most powerful economies in the world left Turkey struggling to steady their economy, and ultimately was a setback in their recovery.
Besides tensions surrounding political conflicts, Turkey is around USD $445 billion deep in foreign-denominated debt, with mostly EU countries, leading to worries that their financial issues will begin to leak into the EU. Considering the fact that the world is currently peeking over the edge to see if what lies ahead is a recession, a low buzz of muted panic is beginning to spread internationally. The fact that Turkey’s currency is entangled with several EU countries also worries many emerging economies, which typically have foreign denominated debt in the euro or the USD, currencies that are more stable and reliable.
President Erdogan’s unorthodox approach to economic policy is quite concerning. His willingness to interfere with an institution whose nature is nonpartisan is a checkpoint in the increasingly authoritarian trajectory that Erdogan’s politics are aiming towards. He has an unconventional approach to interest rates in particular, and has used Islam to explain certain economic phenomena, cloaking things such as high interest rates as inexplicable occurrences, with a religious tinge. While running a deficit and being indebted to other developed nations is not very distinguishable among many economies today, the increasingly authoritarian and partisan approach taken by Erdogan with respect to the economy is what is truly troubling.
With the lira doing somersaults for the past two weeks, the best hope for a financially stable economy is taking the heat off of the tensions between the US and EU, and for some sound economic policies to be laid out. This looks like a difficult challenge for Turkey’s future however, between the ongoing Kurdish offensive, a government who has an unconventional approach to handling economic issues, and who rewards loyalty over democracy.