Lira “Recovers Lost Land” Difficult to Solve Turkey’s Economic and Financial Dilemma

Xinhua News Agency, Ankara, December 22nd. International Observation: Lira “Recovering Lost Land” Difficult to Solve Turkey’s Economic and Financial Dilemma

Xinhua News Agency reporter Zheng Siyuan Shi Yang

Since the beginning of this year, the Turkish Lira exchange rate has gone out of a “roller coaster” type of violent market fluctuations. In less than a year, the U.S. dollar to Turkish lira exchange rate fell from 1:7 to 1:13, and even reached 1:18 at the lowest point, triggering the central bank to sell U.S. dollars and the stock market to trigger a circuit breaker; then President Erdogan announced a series of stability After the exchange rate and measures to deal with inflation, the exchange rate of the lira against the U.S. dollar soared by nearly 50%. Many analysts said that despite the one-day surge in the exchange rate of the lira, the Turkish government’s response measures “to treat the symptoms but not the root cause” may also produce a series of sequelae.

As of the 21st, the exchange rate of the lira against the U.S. dollar remained at around 12.5:1, which has rebounded sharply compared to the consecutive breaks of 16:1 and 17:1 a few days ago.

The recovery of the lira exchange rate is the result of Erdogan’s announcement on the 20th to stabilize the exchange rate and respond to inflation, including a new financial alternative to provide compensation for losses incurred by local currency savings due to the depreciation of the lira in order to reduce the impact of exchange rate fluctuations. The impact of depositors. At the same time, Erdogan emphasized that Turkey will continue to adhere to the new economic model of lowering interest rates, increasing employment and attracting more investment as the priority options.

Analysts believe that the new measures announced by Erdogan are aimed at alleviating the demand for US dollars from retail investors and encouraging Turks to save with the lira in order to end the exchange rate turmoil of the lira. However, industry insiders believe that these measures have not solved the substantive problems facing the Turkish economy.

Ozge Ozdemir, a commentator on the BBC Turkish Channel, said that the biggest reason for the collapse of the lira is Turkey’s pursuit of a competitive exchange rate to promote exports. This policy is described as an “unorthodox” approach, contrary to the mainstream economic theory’s claim to curb inflation by raising interest rates.

Erdogan has always opposed high interest rates, insisting that high interest rates will intensify rather than curb inflation. Since 2019, Erdogan has replaced three central bank governors due to policy differences. Since September this year, the Central Bank of Turkey has cut interest rates for four consecutive months, lowering the benchmark interest rate by a total of 500 basis points. Observers worry that if the current policies remain unchanged, the economic situation will continue to deteriorate.

Turkish commentator Bales Soidan said that the Turkish government has always tended to underestimate the risk of exchange rate fluctuations. If the current economic policy continues, there may be a balance of payments crisis, a large-scale “bankruptcy” and high inflation. Economist Evren Dvegi also believes that Turkey’s inflation expectations will continue to deteriorate and may rise to more than 35% by the middle of 2022.

Data show that in November, Turkey’s consumer price index rose by more than 21% year-on-year, but the Turkish central bank still maintains its mid-term inflation target at 5%.

Speaking of the current financial situation in Turkey, Turkish economist Arda Tuncha said: “We have never experienced this kind of complete departure from economic rules.”