Turkey: Turkish lira ends 2021 on a rollercoaster ride
January 11, 2022
The Turkish lira suffered in the days ahead of the Monetary Policy Committee meeting on 16 December, and it ended the following day at a new record low of TRY 16.42 per USD. On 20 December, President Recep Tayyip Erdogan announced a new, radical plan to shore up confidence in the country’s battered currency. The lira rallied strongly immediately after the new measures were unveiled, trading at TRY 10.65 per USD on Friday 24 December. However, the rally was relatively short-lived as the currency began to lose ground again in the week after, likely due to skepticism over the effectiveness of the new plan, which is intended to reduce dollarization. On 7 January, the lira ended the day at TRY 13.15 per USD. While this marked a 4.2% month-on-month appreciation, the currency was still down 43.4% over the same day a year prior.
The president pledged that the government will cover the losses incurred by holders of lira-denominated deposits due to foreign-exchange fluctuations. The emergency measures apply to foreign exchange-protected lira deposits with a maturity between 3 and 12 months. However, the average maturity of all accounts falls short of that stipulation, raising questions over how effective the policy will be.
Moreover, the plan will prove costly, whether it works or not. The credibility and independence of the Central Bank and other institutions has been eroded, weighing on the currency and inflation outlook. If the measures fail to shore up confidence in the lira, the government’s budget will take a large hit as it will have to compensate holders of lira deposits for their losses. This would likely further fuel inflation as the Central Bank would print more money, further undermining the currency. If, however, the emergency measures are successful, then the lira will strengthen. This would nevertheless undermine the government’s new economic model, which relies on lower borrowing costs and a weaker currency to boost exports.
While some stability could return to the lira in the aftermath of the president’s announcement, the government is taking on large new obligations as economic policy continues along unorthodox lines. This has already inflicted notable pain on the country’s currency and economy.
Analysts at the EIU commented:
“The new savings instrument appears to have succeeded in interrupting the free-fall of the lira, and soaring prices. However, some details (such as an exit strategy and the means by which the banks are to hedge their new liabilities) have yet to become clear. […] Nevertheless, the currency's recovery will be partial, and further volatility is to be expected. Similarly, the rise in inflation will only be curtailed to a limited extent.
Author: Jan Lammersen, Economist