The Lira Crisis: Why Is The Turkish Currency Crashing?

No one likes inflation, right?. Whenever prices rise, it hurts everyone¡¯s pockets. Whether its the vegetables of your grocery or fuel prices, hike in prices of things that we consume, especially on a day to day basis, hurts us all. But what if not just one or two but everything becomes pricey in your country? That's what Turkish citizens are facing. Their currency, Turkish Lira is losing value quickly. In fact, it has lost nearly 40% of its value within just a year, probably making it the world¡¯s worst-performing major currency. So whats been the reason behind this crisis?

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The President¡¯s role

This plunge is largely due to the policies enacted by Turkish president? Recep Tayyip Erdogan. He believes to first keep the interest rates low, which allows businesses to borrow at a more affordable rate, hence giving them room to grow and expand. Sounds okay, right? But it isn't. This logic is problematic when your currency is already weak, like it is the case here for Lira. And now, the Turkish currency is floating everywhere, with investors losing confidence drastically, which is resulting in dumping of whatever little currency they held previously. Hence, the Turkish lira is in a free fall.

As we all know, excess of anything isn¡¯t a good idea, even money. When your money fails to hold value, that's what triggers inflation.

Unlike what any sound economist would do, i.e. to jack up the interest rates and make borrowing a chore in order to remove the excess supply in the hope of stabilising the currency, the Turkish President is doing the opposite. In fact, he believes the best way to tackle inflation is to keep interest rates low, and to prove this hypothesis, he has been putting everything at risk.

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Why is the central bank nowhere to be seen?

Now you may think, why is the President deciding the interest rates, isn't that what the central bank does? Yes, but unfortunately, the central bank in Turkey had lost its independence a long time ago.

Hence, the Turks have to bear with an autocratic ruler who thinks he knows everything. Moreover, since July 2019, the President has already sacked three central bank governors who attempted to increase interest rates, and has fired any central bank official who questioned his policies.

Now, the only thing that remains is the President¡¯s ¡°unorthodox¡± ideas, which are, sadly, pushing Turkey to the brink of a total economic collapse anytime soon.

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