Turkey’s currency is crashing. What’s the impact?

In recent months, Turkey’s troubled currency has plummeted to all-time lows versus the US dollar and the euro, as President Recep Tayyip Erdogan pushes through with a widely panned plan to reduce interest rates amid rising consumer costs.

As a result, families are finding it difficult to buy food and other necessities, and the Turkish lira has lost about 40% of its value since the beginning of the year, making it one of the worst-performing currencies in the world.

Here’s a look at the Turkish currency problem and how it’s affecting a country with sky-high inflation:

Even though inflation has increased to approximately 20%, Turkey’s Central Bank has slashed borrowing prices by 4 percentage points since September, in accordance with Erdogan’s intentions.

Erdogan, who has been in power for over two decades and has become increasingly autocratic, has long claimed that high interest rates create inflation, despite analysts’ claims that raising rates will lower prices.

The rate cuts have prompted questions about the bank’s independence, and the country’s unusual monetary policy has frightened international investors, who are selling Turkish assets. Turkish residents are also racing to change their savings into foreign currencies and gold in order to hedge against rising inflation.

“People bring their money and want to purchase dollars all the time.” When will it all come to an end, and where will this all lead? “They’re in a panic,” Hulya Orak, a currency exchange office employee, said. “People are always in a panic and are spending money from under their beds.”

As a result, the Turkish lira has been falling to new lows versus the dollar and the euro, having barely recovered from a currency crisis in 2018.

On Nov. 23, it hit a record low of 13.44 versus the US dollar after Erdogan said that he would not back down from his unorthodox policies. The lira fell to an all-time low of 14 to the dollar on Tuesday, as Erdogan repeated that the cutbacks will continue, and amid hints that the US Federal Reserve may tighten lending for households and companies as inflation rises.

According to official numbers issued Friday, basic commodities costs have risen by more than 21%, and many individuals in this country of more than 83 million are struggling to make ends meet. The independent Inflation Research Group, which is comprised of academics and former government officials, estimates that inflation is running at 50%.

The depreciated lira has pushed up costs, increasing the cost of imports, petrol, and everyday items in Turkey, which relies on imported raw materials. Meanwhile, rentals have soared, and property sales prices, which are mostly based on the dollar, are rising.

Long lineups develop at kiosks selling bread for a lira less than bakeries and supermarkets every morning.

As he waited in line, Sinasi Yukselen added, “We’re cutting back on everything.” “I used to purchase ten loaves a week, but now I only bought five.” We’ve given up on finding beef.”

Emine Cengizer claimed she went to buy her adolescent daughter a winter coat at a bargain shopping complex in Ankara, but she came up empty-handed.

“We won’t have anything to eat for the rest of the week if I buy the coat,” she remarked.

A prospective brain drain worries Selva Demiralp, an economics professor at Istanbul’s Koc University.

“It’s going to be extremely difficult for us to keep those highly educated white-collar professionals at home when the wage difference between what you can make in Turkey and what you can earn overseas expands so considerably,” she added. “And that is a significant threat to the country’s future.”

To stimulate the economy, improve growth and exports, and generate employment, Turkey’s president has pushed for cheap borrowing prices. He has promised to disrupt the cycle of an economy that is reliant on short-term “hot money” attracted by high interest rates.

According to economists, increasing borrowing costs reduces inflation, which has been rising globally as the economy recovers from the coronavirus epidemic, but is particularly acute in Turkey due to the government’s unconventional policies.

Erdogan, a devout Muslim who considers usury to be a sin, has referred to interest rates as “the mother and father of all evil.” Three central bank governors who fought rate cuts have been sacked. Erdogan selected a new finance minister on Thursday, who is seen to be supportive of the campaign for cheap borrowing rates, causing the lira to fall somewhat.

“We are reversing the policy of luring money with high interest rates with the new economic model.” Erdogan claimed last week that “we are encouraging production and exports with low interest rates.”

Turkish President Recep Tayyip Erdogan has blamed the currency crisis on foreign forces seeking to destabilize the Turkish economy, claiming that his administration is fighting a “economic war of independence.”

According to economist Demiralp, the government is doing the exact opposite of what is usually done to keep costs down.

“The central bank says that by lowering interest rates, it would be able to keep inflation at bay. “This tale isn’t being bought by the markets,” she remarked.

“I think even growth is highly questionable at this point because you are going to see more contraction as a result of the panic and uncertainty and escalating costs coming from this crisis,” Demiralp said, “but I think even growth is highly questionable at this point because you are going to see more contraction as a result of the panic and uncertainty and escalating costs coming from this crisis.”

His early years in office were characterised by a robust economy, which enabled him to win multiple elections. Soaring consumer prices have recently harmed his reputation, with opinion surveys indicating that even his supporters are concerned about his economic policies.

Last week, police broke up tiny protests by organizations protesting the high cost of living in Istanbul and many other Turkish cities. Hundreds of individuals were arrested.

In opinion surveys, a coalition of opposition groups created to oppose Erdogan’s ruling party and its supporters has been gaining ground. Early elections are being called by members of the opposition alliance, who accuse Erdogan of “treason” for mismanaging the economy.

Erdogan has refused to call early elections, claiming that the vote would be held in 2023 as planned.

He stated last week that the government is working on measures to create 50,000 new jobs and that the minimum wage would be raised.

“We are prepared to take initiatives, one by one, to reassure citizens whose purchasing power has dwindled,” Erdogan stated.

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