Downward spiral of Turkish lira – President Erdogan finally enforces his plans – News

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When it comes to the number of crown cases, Turkey is not one of the top positions. At least if you believe the official information. Despite this, the crisis hit the country on the Bosphorus with all its might. Because there are no tourists.

In Corona times, hardly anyone spends their holidays in Istanbul or on the beaches of Izmir and Antalya. Tourism is extremely important for Turkey: it accounts for about 12% of the total economic output.

Collapsing prices even before the crisis

Holidays in Turkey would be cheap at the moment. Because the Turkish lira is in free fall. It has lost 30 percent of its value against the dollar since the beginning of the year. The downward spiral is turning: the greater the losses, the greater the concerns among investors. They threaten further losses.

The currency rate acts as a clinical thermometer for the state of the economy. And this has been in intensive care for years. So the collapse in prices started long before the crisis. The lira today is worth one sixth like ten years ago.

Not only tourism is affected

Not only has tourism collapsed. The pandemic has also affected Turkish exports. This exacerbates a chronic problem facing the Turkish economy: the current account deficit. In addition, the krona crisis dissolved the central bank’s reserves. All of this is putting pressure on the Turkish lira. Because the lira has a credibility problem: Investors prefer stable currencies like the Swiss franc.

In this difficult economic situation, President Recep Tayyip Erdogan replaces some of his own. He fired the former head of the central bank after only about 16 months in office and replaced him with a new one. And the finance minister, Erdogan’s son-in-law, took his hat.

However, it is debatable whether this will change anything. Because the basic problem is not the team, but their lack of independence from Erdogan. Growth is essential for him. Criteria such as price stability or a stable currency are secondary to him. Interest rate hikes are absurd for Erdogan, who has repeatedly called himself an “enemy of interest rates”.

Central bank under political pressure

This puts enormous political pressure on the central bank. A rate hike would be a recipe against the collapse of the lira, but the president does not want to hear about it. In July 2019 Erdogan fired then central bank chief Knall on the case; presumably because it didn’t cut interest rates too quickly.

November 19 is the day of truth when the central bank decides the key interest rate. The new guardian of the currency is called Naci Agbal. As a former finance minister, he is on good terms with Erdogan. Agbal’s statement that he would strictly base his actions on price stability helped the lira rise in rate temporarily.

However: there is no significant increase in the rate. Because even if the individual actors responsible for monetary policy in Turkey are replaced from time to time: in the end, President Erdogan enforces his plans. Erdogan is facing the challenge of finding a middle ground: on the one hand he will do everything possible not to lose face, on the other hand he will not have to bet the confidence of investors in the crisis of the crown.