The Turkish economic crisis continues to deepen, with the lira still falling against the dollar, trading at approximately 15.91 liras to 1 US dollar, the inflation rate rising, and the Turkish foreign reserves shrinking, despite recent policy changes by the Central Bank of Turkey that were supposed to increase them.
Let us provide a bit of background first. Turkey’s economy has been unstable since 2018 and has experienced high inflation rates. Contrary to the prevalent economic theory, Turkey’s President Erdogan insists that low interest rates can curb inflation and has been pressuring the Central Bank to keep them low.
“My belief is that interest rates are the mother of all evils. Interest rates are the cause of inflation. Inflation is a result, not a cause. We need to push down interest rates,” President Erdogan, now infamously, stated at an event in 2018.
His position has not proven true, at least as of late May 2022. The lira was the worst-performing currency in 2021 and fell by 44%, and has been the third-worst performing currency so far in 2022. It reached historic lows in December, when the lira traded at 16.68 liras to 1 USD.
The Central Bank sold its foreign reserves to strengthen the lira and managed to do it in the short term. By late December, the lira traded at 10.68 to the dollar. However, it started falling again in 2022 and has been on the decline since May 8, reaching 15.91 to the dollar as of May 23. The inflation rate was at 61% in April, a two-decade high.
Finally, Turkish foreign reserves are shrinking, which limits Turkey’s ability to sell them to prop up the lira. On April 15, the Central Bank instituted a new policy – that Turkish exporters need to sell 40% of their foreign currency revenues to the Central Bank.
However, the latest data does not show this policy to be working as intended. The gross foreign currency reserves were depleted by $4.8 billion from May 6 to 13. This brings the total holdings (not accounting for gold reserves) to $61.2 billion, a 10-month low.
Source: Bloomberg, Turkey Central Bank
In total, the lira is struggling and 2022 has been, so far, no better than 2021 for the Turkish economy. The solutions implemented by the Turkish Government do not appear to be working, as the lira continues to depreciate and the foreign reserves shrink. We will keep you updated as the situation unfolds.
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