How Bad Economic Policy Lead to Collapse of Turkish Lira
One of the worst-performing currencies is the Tuirisk Lira which has collapsed 45% versus the U.S dollar over the past year. So what is causing this collapse in the Lira? Here is what is causing one of the most stunning currency crises in recent memory.
Turkey President Has Declared “War on Economic Independence”
It is no secret that Turkey’s President Tayyip Erdogan likes to take a heavy-handed control of all aspects of the government, That includes putting pressure on Turkey’s central bank to engage in aggressive interest rate easing. In fact, Turkey’s central bank has eased rates by a stunning 400 basis points since September of this year. This has led to a quick deterioration of the Turkish Lira.
Erdogan Replaced Hawisk Central Banker with Someone Friendlier to His Policies
Ideally, Central Banks are supposed to be immune to political influence. However, Turkey’s president has sacked hawkish central bank chief Naci Agbal and replaced him with Sahap Kavcioglu who shares the President’s preference for higher interest rates.
A Complete Lack of Independence at the Central Bank
Turkey’s Central bank has seen a revolving door when it comes to the appointments of its chief position. In fact, there have been four central bank chiefs in the last 2 ½ years. This type of instability and lack of independence, in such an important economic office, is never a positive for a nation’s economy.
Central Bank Inability to Raise Interest Rates
One of the best ways to protect a country’s currency is for its central bank to raise its interest rates. With Erdogan’s right control over the central bank, it will not have the ability to raise interest rates to defend the Lira.
The Majority of Debt is Foreign Currency Linked
To make matters even direr for Turkey, 57% of its debt is in a foreign currency or dominated by a currency other than the Lira. That means that the weaker the Lira gets, the more expensive the debt becomes.
Turkey’s President Will Not Reverse Course Until Turkey is at a Breaking Point
As a political “strong man” who has been in power for 20 years, it is not expected that Erdogan will reverse his anti-high-interest rate policies until Turkey is at a “breaking point.” That could mean that Turkey could experience a total economic collapse by the time interest rates are brought under control.
Hyperinflation is Wrecking Havoc Across Turkey
Because of the aggressive rate-cutting, prices across Turkey have risen far past the ability for citizens to keep up. The country has among the highest inflation rates in the world at 20% as of the last quarter. That means that the average price of goods and services is 20% higher than they were just a year ago. This has caused many Turks to abandon using the Lira altogether.
Turkey’s Poor Economic Policy Continues Collapse in Lira
Unless Turkey’s central bank has the ability to raise rates, we could see a further collapse in the Lira. Those could lead to continued hyperinflation and perhaps even a complete collapse in the Turkish economy.
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