The Turkish Lira has been gasping for air, as it struggles not getting swallowed up by the predatory double-digit inflation haunting the nation.
Since the start of 2020, the Lira has lost 30% of its value against the dollar. The succession of lows for the currency in recent weeks have further bruised the already sinking Lira, as it tries to fend off the near 12% inflation rate that persists. The decline has been accelerated since the central bank held back from raising interest rates in its October meeting. However, the currency’s near 5% leap against the dollar on Monday 9th November did spur some hope in the eyes of investors with respects to its future prospects.
The history of the Turkish Lira is far from plain sailing. Chronic inflation in the late 1970s, multiple recessions and The Guinness Book of Records ranking the Lira as the world’s least valuable currency, prompted the Grand National Assembly of Turkey to pass a law that allowed for redenomination (the process of changing the face value of banknotes in circulation). This was achieved by the removal of six zeros from the currency in December 2003; however, since this reform, inflationary pressures have continued. Turkey’s president, Recep Tayyip Erdogan, is the undeniable driving force leading to such volatility. His unorthodox view that high interest rates are part of a “devil’s triangle” and the “mother and father of all evil” would gravely unsettle Irving Fisher as this ideology is in direct opposition to the economic theory he coined: The Quantity Theory of Money.
(Image thanks to the Financial Times)
Fisher’s theory is centred around the idea that variations in price relate to variations in the money supply. Therefore, following this theory, if Turkey’s central bank was to tighten fiscal policy and raise interest rates, inflation should be brought under control. This is because the cost of borrowing becomes more expensive, reducing both investment and consumption. As a result, the money in circulation should decrease; subsequently, lowering the price level and with that the rate of inflation.
Erdogan’s unorthodox monetary policy has meant that for years he has prioritised low borrowing costs and fast-paced growth. The drowning Lira has been a direct consequence of such backward policy recommendations, as high inflation, a current account deficit and the erosion of foreign reserves, paired with political distrust, has deterred investors.
In early November, however, the tides turned on the Turkish Lira. A political shakeup resulted in the Istanbul Stock exchange seeing its biggest jump since August, as it gained almost 5% against the dollar on the evening of Monday 9th November. This recent rebound can be explained by Turkey’s finance minister and Erdogan’s son-in-law, Berat Albayrak, stepping down after five years in front-line politics. Albayrak said in a statement on Sunday that he was stepping down for health reasons, however, according to the Financial Times, members of the finance minister’s inner circle were blindsided by this shock announcement. This move came just days after a new governor of the central bank, Naci Agbal, was appointed.
Murat Uysal, the former governor of the central bank, appeared to have been Mr Erdogan’s puppet as he frequently cut interest rates and largely resisted market pressure for a rate increase. In a failed attempt to keep the currency afloat, the country burnt through tens of billions of dollars of its reserves.Therefore, now, the question is whether Mr Agbal can be the Lira’s lifeline?
In short, although the future is unpredictable, the market’s reaction on Monday suggests there is hope. Robin Brooks, chief economist at the Institute of International Finance (IIF) and a former chief currency strategist at Goldman Sachs, highlighted Agbal’s opportunity to revive the Lira due to the current “market sentiment, which wants to believe in change”. Brooks conveyed the need for “minimum action” with “maximum effect”. However, Erdogan’s likeness to leaders such as Viktor Orban and Vladimir Putin means Agbal’s hands may be tied. The outcome from the next rates meeting on 19th November will signal whether the unconventional monetary policy experiment that Turkey has been partaking in is nearing an end.
The waters are still murky for the Lira; however, the west should not disregard Turkey as the country tries to meet its ambitions of playing a more influential, regional and global role – much like many of its NATO allies. This is not to say that Erdogan hasn’t got many more battles to fight. Biden’s US presidential win could hurt the Lira further as the Turkish government faces possible U.S. sanctions over the purchase of a Russian missile system. Additionally, Turkey continues to tackle slow growth, a collapse in tourism, cronyism and the violence spewing out of war-ravaged Syria. Coronavirus is only exacerbating these economic woes, however, in spite of all this, the Lira continues to fight on.