What are the weaknesses of the Turkish economy

Exchange rate falls to a record low : Turkey suffers from the weakness of the lira

Turkey has slipped into a new severe currency crisis that is causing incomes to shrink and the government of President Recep Tayyip Erdogan to be put under pressure. The local currency, the lira, fell to a new record low against the euro and dollar on Friday, accelerating a downturn that had been going on for months. The cause is not only the corona pandemic, as a result of which Turkey is losing important income from tourism. The policy of the Turkish government, which does not want to raise interest rates despite high inflation, and the foreign policy tensions in the eastern Mediterranean are also weakening the lira. The opposition calls for the resignation of Finance Minister Berat Albayrak, Erdogan's son-in-law.

One euro cost 8.71 lira on Friday, while one dollar temporarily cost 7.36 lira. Since the beginning of the year, the currency has lost more than 25 percent of its value against the euro and almost 20 percent against the dollar. The courses recovered later. Only two years ago, a Turkish dispute with the US triggered a currency crisis. The lira also began to descend in the spring, but this time the drop is even deeper. The Turkish economy is experiencing a Chernobyl, commented the newspaper "Karar".

The money is worth less

The crisis hits ordinary consumers hard. At the beginning of the year, the monthly minimum wage, which applies to millions of employees, was still worth 350 euros - today it is 267 euros. "The economic crisis is worse than the pandemic," says a small business owner in Istanbul. Before the pandemic broke out in the spring, Turkey had just recovered from a recession. The International Monetary Fund (IMF) now expects the Turkish economy to shrink by five percent this year. Tourism, which poured around 30 billion euros into the state treasury last year, will not be a source of foreign currency this year due to the corona crisis. Turkish exports also fell by almost 14 percent in the first seven months of the year compared to the same period in the previous year. The trade deficit is growing.

The Turkish central bank and state-owned banks have tried in recent months to stop the lira from falling with a multi-billion dollar support program - in vain. Because of the expensive action, the foreign exchange reserves of the Turkish monetary authorities melted away. Since the beginning of the year alone, the reserves have fallen by 30 billion dollars to 51 billion, reported the Reuters news agency. Some analysts warn that the bank could run out of money in the coming months. "They are looting the cash register," said opposition politician Erdogan Toprak in the newspaper "Sözcü" about the government.

Does politics influence the central bank?

Political pressure on the central bank makes the situation worse. Despite an inflation rate of almost twelve percent, the central bank, on instructions from Erdogan, has cut key interest rates from 24 to 8.5 percent since last year. These negative real interest rates are also weighing on the lira. Normally the central bank would raise interest rates now, but Erdogan is a declared opponent of interest rate hikes: last year he fired the then central bank chief because he resisted interest rate cuts. Erdogan also rejects an aid program from the IMF.

The analyst Timothy Ash of the asset manager BlueBay wrote on Twitter that the Turkish government absolutely wants to avoid a rate hike. According to a report by the Bloomberg news agency, there were signs that the central bank was abandoning any further support for the lira, at least temporarily. That could accelerate a further decline in prices.

According to calculations by the government-critical economic expert Mustafa Sönmez, foreign investors withdrew around 13 billion dollars from Turkey within a year. In addition to the dwindling confidence of many investors, there is foreign policy turbulence. After a temporary calming down, the dispute between Turkey and its neighbors over gas supplies in the eastern Mediterranean is currently escalating again. Greece and Egypt, two opponents of Turkey in the conflict, signed an agreement this week on the delimitation of their economic zones in the Mediterranean, which rejected Turkish claims in the region. The dispute strains Turkey's relations with the EU, Ankara's most important trading partner.

The government rejects the responsibility

Nevertheless, Erdogan's government sees no reason to change course. All crisis scenarios would come to nothing, said Ömer Celik, spokesman for the ruling AKP party. As with the other currency crises in recent years, Erdogan's supporters are trying to blame the foreign exchange rate drop of the lira on foreign countries, which want to prevent Turkey from becoming a regional power. The current “economic attack” and the Greek-Egyptian treaty were aimed at driving Turkey out of the Mediterranean, wrote Ibrahim Karagül, editor-in-chief of the government-affiliated newspaper “Yeni Safak”.

Finance Minister Albayrak is not expected to take political responsibility for the crisis and step down. However, Erdogan could be forced to agree to a rate hike because of the crisis. It is not certain whether this would stabilize the lira over the long term. The government has not yet presented a conclusive plan to save the lira.

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