Nowadays, the Turkish Lira is constantly losing value and no one can predict when this meltdown will stop. At the time of writing this article, the Turkish Lira has lost 6% of its value compared to the previous day. The US Dollar/Turkish Lira exchange rate, which was 11.29 a month ago, is now 17.44.
High inflation is not a foreign phenomenon in Turkey. In the 1990s, we were used to inflation rates above 50%. After the economic crises in 1999 and 2021, a serious struggle against inflation started, accompanied by the IMF program. Thanks to the economic reforms carried out, inflation was reduced to single digits. Inflation rates were in the range of 6%-10% between 2003 and 2017 in Turkey. As of 2018, the Turkish Lira re-entered the inflation-devaluation spiral. In 2018, 2019 and 2020, inflation was 20%, 12% and 15%, respectively. In November 2021, inflation was measured as 21%.
In the last three months, the Turkish lira has lost half of its value against almost all currencies in the world. 30% of this astronomical increase in the exchange rate is expected to turn into inflation in 2022. Since there was 21% inflation at the end of November (according to official figures, which no one believes), it is not difficult to predict that Turkey's inflation in 2022 will be above 50%.
So why is the Turkish lira losing value nonstop? One of the reasons is that banks give negative real interest on Turkish lira deposits. The Central Bank of the Republic of Turkey reduced the short-term interest rate to 16% with its meeting on November 18. The interest rate announced by the central bank greatly affects the interest rates given by banks to deposits. This means that the real interest rate of the Turkish lira is minus five percent. Turkey is not the only country that applies negative real interest rates. The problem is that nobody trusts the official inflation announced. By increasing the minimum wage by 50%, the government actually accepted this fact.
Savers are turning to foreign currency and cryptocurrencies to protect the value of their savings. The Central Bank is trying to prevent the excessive volatility in the Turkish lira by intervening in the market in the direction of sales. Since the Central Bank's foreign exchange reserves are known to be negative, market actors do not care about these interventions. After declining for several hours, exchange rates are rising again. Economists agree that what needs to be done is to raise Turkish Lira interest rates.
The problem is that President Recep Tayyip Erdogan believes that interest rates are the cause and inflation is the result. President Erdogan persists in his thesis that low-interest rates will reduce inflation, although the data suggest otherwise. He dismissed three central bank governors on the grounds that they had not cut interest rates as quickly as he wished in the last two years.
The turmoil in the economy causes Ak Parti's already declining vote rate to decrease even more. It would be a mistake to think that President Erdogan is not aware of this situation. I do not agree with the comments that his health problems prevent him from thinking properly. I think that he continues to insist on low interest in order not to damage the image of a strong leader who does not take a step back. It is extremely important for politicians to appear strong in societies such as Russia and Turkey, where the influence of feudal values persists.
Although the rapid depreciation of the Turkish lira creates a profitable situation for crypto investors, I am not happy with what is happening. The poor masses who support President Erdogan will suffer the most in this crisis. Meanwhile, the middle class, which is opposed to Erdogan, will also be adversely affected by rising prices.
Currently, the only solution seems to be an early election. Opposition parties have been expressing their demands in this direction for some time. However, the AK Party government insists that the elections be held in 2023 according to the normal calendar. Turkey is a country where balances can change very quickly. Sülayman Demirel, one of Turkey's former prime ministers, used to say, "There is no government that an empty pot cannot overthrow." We will see what the next days will bring.
Thank you for reading.