Turkey is currently fighting against a currency crisis. The Turkish Lira has de-escalated in value to about 50% in 2021 against the US dollar. Turkish Lira was termed the worst-performing currency in 2021 compared with other emerging markets.
There are different reasons cited for this crash. According to experts, the intervention of Turkey’s central bank has impacted a lot in this fall. Dollar hoarding and protests against Tayyip Erdogan for his wayward economic policies are the other believed reasons. This article has covered all you might be wondering about this plunge in Turkish Lira value.
REASON FOR LIRA CRASH
In December, Turkey’s Central Bank voted to cut interest rates by a whole percentage point. This cut of interest rates is the fourth time since September 2021. Now, lowering the interest rate does to the economy because when the interest rates are down, people tend to borrow more money and save less. Since low-interest rates make money borrowing less expensive, the flow of money in markets increase. Businesses and economies prosper in this case, only if inflation is average. But when inflation is soaring in the pandemic, this decision of lowering interest rates has backfired for the Turkish Lira. The inflation rate in turkey as of December 2021 is 21%, about four times more than its target rate, i.e. 5%. In this high inflation, lowering interest rates will only allow more inflation to follow.
President Tayyip Erdogan believes that lower interest rates will help turkey get out of inflation and boost the economy. In the third quarter of 2021, the economy did expand, and exports did get encouragement. But it did not last long. Due to the declining Turkish Lira, importing became costly and businesses working on imports suffered. Towards the fourth quarter, the situation worsened, and the economy shrunk. Erdogan has sacked three central bank chiefs recently, not allowing them to settle interest rates. Erdogan himself believes that the reason for currency declines is the sabotage of the Turkish economy of foreigners, and they are fighting some “economic war of independence”.
Erdogan’s unconventional monetary policies have just worsened the situation for currency in the market. Recently, intervention took place when Turkey sold US dollars from its foreign reserves to stabilize the Turkish Lira, which resulted in a hike but not for long.
Erdogan is in no mood of changing his unconventional mind, which means that the coming days for the Turkish Lira show no signs of hope. On the other hand, the US dollar will keep strengthening due to easy-money policies, devaluing other currencies, including Lira.
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