Turkey’s currency Lira has fallen by over 70 percent against the US dollar in the year 2018 and is now at its all-time low. The global markets, especially Europe, are looking closely at Turkey as it stands on the edge of an economic crisis. Turkey is suffering a decline in the value of the its currency, commonly known as the currency crisis, that negatively affects an economy by creating instabilities in exchange rates, meaning that one unit of a certain currency no longer buys as much as it used to in another currency.
There are plenty of reasons that plummeted the Turkish Lira against the US dollar. After the developed economy
attenuated interest rates following the financial crisis of 2008 to propel growth, cheap foreign debt was
easily available to Turkish companies and real estate developers. According to a New York Times report,
Turkey is more reliant on foreign currency debt, mostly dollar-denominated, that corresponds to about 70
percent of Turkey’s economy. Data from the Bank for International Settlements (BIS) uncovers the degree
to which global banks have financed Turkey’s growth.
Turkish borrowers owe Spanish banks $83.3 billion; French lenders $38.4 billion; banks in Italy $17 million; Japanese banks $14 billion; UK lenders $19.2 billion; and the United States about $18 billion. Unsurprisingly, abatement in Lira will trigger panic in the banking sector on top of Turkish
companies defaulting on the debt.
Now it is upon Turkey’s government on how they want to recoup from the situation. Inflation in the
country stands at 16 percent YTD and interest rates are stagnant at 17.75 percent.
With a rising inflation and bombing currency, central banks adjust the interest rates to regulate both best.
Rather, Turkey’s President Recep Tayyip Erdogan has asked the central bank to forestall any fluctuations in
the interest rates. Turkey is on a verge of an economic crisis and has only a few options to avert the slide. Economists
have slackened its growth to 4 percent this year, in contrast to 7.4 percent last year. The country’s foreign
reserves stand at $130 billion, with a short-term debt of $180 billion. Foreign debt constitutes 70% of the overall
debt.
Capital controls are one of the measures that have historically worked only to a limited extent and the only
option is raising interest rates.
In the overall global economy, Turkey is trivial, but Greece was smaller and it distressed the world. Sooner or later the president has to either accentuate the interest rates, which will work only if implied at earliest or ask for help from International Monetory Fund (IMF). The more the delay in correction; severe will be the spill-over in other economies.
-Sanchita Bhatia
PGD-FA (2018-19)
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