• 01 Jun 2022

Turkey was once considered as a great economic promise. In the early 2000s, Turkey saw rapid economic growth. It became one of the most sought-after tourist destinations and quickly turned into a huge investment magnet. All this was financed mostly by foreign investments and loans. Lower borrowing rates also contributed to a boom in the construction and property market. But the country could not bring down imports, at the same time exports were less competitive. Now the country is clasped with high levels of debt, which is worsened by widened trade deficit, hyperinflation and lower returns from existing heavy investments.

The Turkish currency Lira has been in a down-slide since early 2018. This dramatic fall was fueled by an amalgamation of factors like red hot inflation, mounting foreign debts, shrinking currency reserves, dollarization, geopolitical tensions with the West and capital flight due to withdrawals. But the main trigger was Turkey's president Recep Tayyip Erdogan's response to the "Debt-Currency Crisis” of the country .

Lira tumbled to an all-time low against the US dollar by losing nearly 80% of its value and now it has the irresolute title of ‘country with 6th highest inflation rate in the world’. But even when the inflation was skyrocketing and the Lira was plummeting, surprisingly the Central bank continued to lower the interest rate.

The annual inflation rate in Turkey accelerated to 69.97% in April of 2022, the highest since February of 2002. To cool inflation, the usual monetary policy taken by Central Banks is to hike interest rates. However, the President Recep Tayyip Erdogan insists on keeping interest rates low. The Central Bank slashed interest rates by 500 basis points from 19% to 14% post COVID-19. He believes that lower interest rates promotes investments, higher investments equates to increased production, which in turn makes products cheaper, so that more exports could happen and make the country richer. His religion-embedded authoritarian stance invited controversies. He even fired the top Central Bank officials responsible for interest rate changes. Decisions like naming his son-in-law as the Finance Minister sparked lots of criticisms from all corners. The unconventional “Erdoganomic” policies diminished investor confidence and crashed currency.

Another problem is the country's foreign exchange reserve depletion. The Central Bank has intervened many times in the market by selling foreign currencies which led to decrease of net reserves. Imbalanced financial system stimulated more depreciation of the Lira.

Due to the failed military coup, US sanctions, other political tensions with other countries along with increasing economic instabilities, many local and foreign investors were hesitant to inject more funds into the economy and are trying to withdraw from existing investments. It is sad to watch a country with such rich history and culture vanish into nothingness!

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- Alina Helen