Turkey is in the grip of a currency crisis as the Lira has lost over 40% of its value against the dollar in the past one year. The currency crashed about 30 percent in the month of November 2021, showing the slide is far from over.
At the root of the lira’s problem is the inflation-interest rate mismatch. If the rate of interest is lower than inflation, it would mean that the currency is losing value in comparison to other assets. For example, if the interest rate is 10% and inflation is 20%, any item you buy for 100 lira now will be priced at 120 liras next year, but the lira will itself earn only 10% interest, meaning 100 liras will become only 110 liras next year. In effect, the lira will keep losing its value if the inflation-interest rate mismatch continues.
There is another way to look at it. If the interest rate lowers, money can be borrowed cheaper, and in turn more money will be chasing the same amount of goods, fuelling inflation. Of course, when inflation too is low, cheaper money means people can buy more goods and producers can get cheaper loans to make more goods, expanding the economy.
Governments love lower interest rates because that increases economic activity, allowing them to make claims about good economic growth and more jobs. So, in countries where the central bank – that controls the monetary policy – is not independent, the government generally arm-twists the bank into lowering interest rates. This is what has happened in Turkey, where President Erdogan has changed central bank heads thrice in two years. While inflation is hovering around 20%, the interest rate is 15% and Erdogan wants to slash it further. The likelihood of further reduction in interest rates is fuelling more inflation.
There are other elements to the problem as well. With its foreign reserve dwindling, the central bank doesn’t have much option of selling dollars to try and shore up the lira. Adding to the problem is the fact that Turkey depends upon imported fuel (which has to be paid for in dollars) and the external debt burden that too has to be serviced in foreign currency, and you have an economic quagmire.
With inflation making it difficult for people to make ends meet, there have been protests against President Erdogan. On the economic front, there are long queues at petrol pumps and shops selling bread. Unemployment has increased, and due to high living costs, most people are finding it difficult to even afford basic needs like food and clothing. With the approaching winter season set to increase spending on fuel and warm clothing, the common people are staring at a difficult few months ahead.
About the Author : Writer Shweta Pandey has been associated with reputed media houses since long and has witnessed many major political events closely. She has authored this write up for KSHVID NEWS NETWORK. Views expressed here are her personal opinion /analysis. She is based out of Delhi (india).