Collapse of lira and its impact on Turkish economy

Mahmoud al-Batakoushi

The Turkish economy has recently become in an unenviable position following the unprecedented decline of the lira for decades due to Turkish President Recep Tayyip Erdogan and his constant interference in the work of experts, as he sacked three governors of the Turkish Central Bank in less than two years for raising interest rates.

In July 2019, Erdogan dismissed Murat Çetinkaya from the governorship of the central bank. In November 2020, he dismissed Murat Uysal from the post, and in the same month, the finance minister submitted his resignation.

Then, in March 2021, Erdogan dismissed former Central Bank Governor Naci Agbal after the latter raised the main interest rate by 200 points from 17% to 19%, and the Turkish lira fell immediately after the dismissal decision by more than 15%. Erdogan then appointed ŞahapKavcıoğlu but is expected to dismiss him soon due to the continued depreciation of the currency, as the president recently dismissed the two deputy governors, Semih Tumen and Ugur Namik Kucuk, along with another member of the Monetary Policy Committee, Abdullah Yavas, which has had a negative impact on investors.

Perhaps Erdogan’s most prominent mistakes are his insistence on reducing the interest rate despite the decline in the Turkish lira and the rise in inflation, which contradicts economic theories that indicate that monetary tightening is the most prominent mechanism of central banks to confront inflation. He justified this by his intention to present a new economic model that supports consumers and producers, and perhaps his recent retreat from this policy and his raising the interest rate gave the lira a kiss of life temporarily, proving that the Turkish president’s policies are behind the economic crisis.

The economic policies taken by the Turkish regime have led to the collapse of the lira against the US dollar since the beginning of 2021, as well as a rise in the inflation rate to reach 21.3% in November. Estimates indicate that inflation rates will continue to rise in light of the weakness of the Turkish lira and the rise in commodity prices globally.

The Turkish president’s decision to raise the interest rate proves that all his assumptions were based on wrong calculations. He believed that the low exchange rate of the Turkish lira would contribute to enhancing the competitiveness of Turkish exports in international markets, giving them a price advantage in the global market, but he did not take into account the increase in prices of production inputs and imported intermediate goods, and consequently the high cost of producing Turkish exports and the increase in their prices in international markets, which led to a decline in Turkish exports, as well as the negative impact from the corona pandemic, in addition to a 65% decline in revenues generated by the tourism sector to less than $10.2 billion as a result of travel and flight restrictions, according to data from the World Tourism Organization.

Erdogan’s bets on his decision to cut the interest rate were also disappointed, as he expected foreign investments to flow from all sides, but he missed the provision of credit, which is not the only factor of course, affecting the investment environment in Turkey, which suffers from many difficulties, perhaps the most prominent of which is the uncertainty of the future of the Turkish economy thanks to continuous government interventions. This led to a decline in purchasing power and high inflation rates, increasing the companies’ burdens of expenses and debts, and it then became difficult to make new investment decisions.