Turkey is going through a very unusual currency crisis. The drop in value of the lira – by roughly a fifth in the past two weeks – was not, as in the past, caused by problems in the country’s economic fundamentals. The country, which has long suffered from a current account deficit, posted a surplus for the second consecutive month in September, thanks to a huge boost in exports and a rebound in foreign tourist numbers. Instead, the currency’s problems almost exclusively reflect the increasingly unpredictable decisions of one man and his influence on the supposedly independent Turkish central bank: President Recep Tayyip Erdogan.
Erdogan blames external forces for the depreciation of the lira. But the latest problems began in March this year after he fired the head of the central bank, Naci Agbal. The respected technocrat was the third governor to lose his job in two years. The appointment of Erdogan’s loyalist Sahap Kavcioglu soon afterwards caused the lira to drop 15 percent before recovering somewhat. The decline then became steep earlier this month after the central bank cut rates for the third time in as many months.
It is true that emerging market currencies have generally performed poorly against the dollar this year. Expectations that the US Federal Reserve will soon begin scaling back its asset-buying program designed to prop up the economy and the financial sector through the coronavirus pandemic have seen the dollar appreciate. Free capital that has sought higher interest rates in developing countries is now returning home. As the Pakistani central bank governor said in an interview with the Financial Times last week, poorer countries with high foreign currency debt are at risk if sentiment changes.
Against this backdrop, Erdogan’s incitement to conspiracy and authoritarian tendencies play even worse than usual. While he had long rebelled against what is known as an “interest rate lobby”, he was also a cunning pragmatist who ultimately enabled the central bank to raise interest rates during earlier periods of currency volatility. This time around, he seems determined to push through his ideological commitment to low interest rates and said earlier last week that Turkey was in an “economic war of independence”.
Opposition parties are optimistic that Erdogan has been in power for the last few years and that the elections scheduled for 2023 will end the vicious spiral. Erdogan’s popularity is waning as higher prices hurt the standard of living. When he was first elected, his Islamist party promised an era of growth and steadily increasing incomes. He delivered for many years, thanks in part to an IMF program that his government inherited and later to a construction boom that has since subsided. Indeed, memories of that era of debt-fueled growth could be behind the president’s continued support for cheap money. This is just one of many available to him to stay in power.
The saga can come to an even more unfortunate ending. The inflation rate is already 20 percent per year, so real interest rates are minus 5 percent. If the president continues an interest rate cut program, the lira will continue to fall and prices will rise inexorably. In these circumstances, the only way the Turks can defend their savings is to turn to a currency that is beyond Erdogan’s control. If he doesn’t suddenly change course, the only question for Turkey, a country with great potential, is how long the president will stay – and how much damage he can do before he leaves.
