The Turkish lira’s woes

Turkey’s voodoo economics Smoke, mirrors and lira

I STANBUL President Erdogan is scrambling to prop up the currency he has debased

In times of trouble, it is good to have something to lean on. For a currency this The immediate source of those risks is Mr Erdogan’s obsession with low interest can be a central bank capable of keeping inflation at bay, or a stable and predictable government to reassure nervous investors. Since today’s Turkey has neither, its swooning currency, the lira, has had to look elsewhere for help. On December 20th President Recep Tayyip Erdogan announced an unorthodox plan to rescue Turkey’s economy from the crisis his policies have caused. It involves the government insuring some lira deposits against swings in the exchange rate.

In the short term the scheme seemed to have worked. The day after Mr Erdogan’s announcement the lira staged a record rebound, quickly erasing a month’s worth of losses. Yet the main factor in the rally was not the depositinsurance programme but the central bank, which spent billions of dollars from its shrinking reserves to buy lira. The currency’s recovery has bought some time for Mr Erdogan, who had been in deep political trouble. But it has only obscured, or even heightened, the risks to Turkey’s economy. rates. For years he has insisted, in defiance of basic economics, that low rates reduce inflation rather than stoke it. Starting in September, with Turkish inflation nearing 20%, Mr Erdogan goaded the central bank into cutting its base rate four times, from 19% down to 14%. That triggered a currency crash. Even after its recent rally, the lira has lost almost 40% against the dollar in 2021, more than any other major currency. Mr Erdogan maintains that a weak lira will be good for Turkey’s economy, boosting exports and attracting investors. Few Turks agree. In a recent poll, 94% said depreciation has had a negative impact. About two in three said they could not meet basic needs without taking out loans. Even more think inflation is far higher than the officially reported rate of 21%.

Fastrising food and energy prices hit the poor especially hard, since they spend a bigger share of their earnings on necessities. There are long queues at shops selling subsidised bread. Real wages have plummeted. Turkey’s middle class, which swelled during Mr Erdogan’s first decade in power, is shrinking. One chef at an Istanbul restaurant says he took out a cash loan in September to stock up on nappies for his infant child, fearing they would soon be unaffordable. Since then their price has more than doubled.

Mr Erdogan would never describe it as such, but his scheme to save the lira is in effect an indirect rate rise for savers. Under the plan, Turkey’s government will compensate holders of fixedterm lira deposits when the currency’s depreciation against hard currencies exceeds the interest rate offered by their banks. Were the dollar to strengthen by 30% against the lira in a year, for example, a depositor at a bank with a 14% annual rate would get an additional 16% courtesy of Turkey’s treasury. The Turkish taxpayer will end up bailing out the Turkish depositor.

The scheme may have helped prevent a run on the banks. Turks had been converting their savings to dollars at a record pace, contributing to the lira’s fall. More than 60% of the country’s deposits are now held in foreign currencies. Some were considering fleeing Turkey’s banks altogether.

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