What Is Behind the Fall of the Turkish Lira?
Over the past ten years, the Turkish lira has declined drastically by approximately 145% against the American dollar, and as of August 13, 2018, it fell to a record low level. In 2007, the lira – one of the highest levels of Turkish currency - was worth 0.84 USD but is only capable of purchasing 0.18 USD today. Behind the dramatically continuous fall of the lira lie rising inflation and low interest rates, increasing foreign debt, withdrawals due to political instability, and rising tensions with the West.
Firstly, rapidly rising inflation at an annual increasing rate of above 15% in Turkey remains unaddressed by proportional hikes in the interest rates. This main cause of this deficiency is the presidency of Recep Tayyip Erdogan, who was reelected President in June with deepening authoritarian powers, and his insistence on averting from the implementation of such hikes. This forbids the central bank to alter the low interest rates. Consequently, these unnaturally low interest rates have only worsened the pressure on the Turkish lira.
Additionally, Turkey has a financial burden of extremely large amounts of debt to other countries, most of which are to be paid in foreign currencies. Therefore, as the lira falls continuously, it becomes more strenuous for Turkey to deal with such financial commitment since the payments are to exceed the previously anticipated installments. Circularly, this situation also causes the declining currency crisis to accelerate as it damages the economy significantly. Also, though the expenditures to Turkish loans is $265 billion –which is less than 1% of the total amount globally, according to the Bank of International Settlements – a debt crisis in Turkey could still trigger a financial contagion. Another international concern is the future of other emerging economies with close levels of foreign debt in dollar as investors withdraw their investments and exit the market due to the increased risks. On May 31, 2018, the Institute of Financial Research (IIF) announced that the debt crisis in Turkey has already begun to affect the economies of Lebanon, Colombia and South Africa.
Due to the political instability in Turkey, both local and foreign investors hesitate to further inject into the economy; in fact, a respectable portion wishes to withdraw from the existing investments. Foreign Direct Investment (FDI) inflow that made up 3.2% of Turkey’s economy in 2007 was reported to amount to only 1.2% of the country’s GDP in 2017. As a result, such refrains prompt the currency crisis to escalate as well, in the sense that the purchases of dollars increase as lira becomes less worthy to invest in.
Moreover, the detention of the US pastor, Andrew Brunson, who was confined of espionage charges after the failed coup attempt in Turkey, has led to one of the many crises between the United States and Turkey. The crisis accelerated an alarming level of monetary flow from emerging markets and disseminating instability throughout the Middle East as relations between the NATO allies almost reached a breaking point. It also drew attention to the fact that the escalated risk that both the political and economic instability in Turkey – which borders Iran, Iraq and Syria – could influence economies beyond itself in the region.
As a response to the detention of Brunson, Donald Trump exerted pressure towards Turkey by imposing further sanctions after having already castigated two Turkish government officials. The economic sanctions therefore doubled the tariffs on Turkey, as imported steel rises up to 50% and on aluminum to 20%. As a result, Turkish steel was priced out of the US market, which previously amounted to 13% of Turkey’s total steel exports.
Turkey is placed as only the 17th largest economy in the world, but the extent of the effects of its economic regression is deteriorating as Donald Trump’s aggressive trade policies unsettle international commerce destructing longtime alliances and threatening global economic growth.