TURKISH LIRA CRISIS

ABSTRACT

The aim of this paper is to point out the 2018 Financial Crisis of Turkey and its impact on

Turkey’s economy. The paper also covers how a disturbance in economic ties and other

relations with the United States of America has affected the economy. Turkish currency and

debt crisis of 2018 is a continuous money related and monetary emergency in Turkey with

worldwide repercussions because of budgetary infection. It is described by the Turkish lira

(TRY) depreciation of the currency, high inflation, rising borrowing costs, and

correspondingly rising loan defaults. The paper explores various shocks in the Turkish

economy and how the Presidential interference in monetary policy has created a negative

impact in the economy.

INTRODUCTION

In recent years, Turkey has been one of the quickest developing economies in the world,

however, its great development numbers were powered by foreign currency debt. There are

various factors affecting Turkish’s economy that led to the crisis in the nation. The Turkish

currency and debt crisis are attributed as contagious as it has also affected the neighbouring

countries especially European nations. The crisis started from 2016 since Recep Tayyip

Erdogan assumed control of the government. Turkey has been running huge and growing

current account deficits and the economy doesn’t have huge reserves to pay back the debts.

There are many factors that led to the crisis in Turkey. In this paper, we will examine all the

factors one by one.

Turkey has huge current account deficits and foreign currency debt since the new President

Recep Tayyip Erdogan assumed control of the government. Turkey developed at a decent

pace yet with the assistance of gigantic foreign capital and making it troublesome for the

economy to repay the loans.

YEAR DEFICIT AMOUNT

2016 $ 33.1 billion

2017 $ 47.3 billion

2018 $ 51.6 billion

Turkey has one of the highest current account deficits in the world and it’s too huge as

compared to the size of Turkey’s economy that it is not easy to repay the amount. This shows

that Turkey as a nation is spending too much as compared to their capacity and the imports

bills have also risen sharply. Turkey which is a well-developed nation and has a great

infrastructure facility such as good roads, public transports etc which are comparable to any

European nation is because of the heavy capital inflows. The problem is the economy is

relying too much on capital inflows so that they can fund the private sector, big industries and

the banks are also borrowing heavily that too in foreign currencies to fund various huge

projects and hence, Turkey looks a highly developed nation. The Turkish Lira which has

depreciated almost by 40% now it has become even worse situation for Turkey to repay

borrowed capital. Under these situations, Turkey needs around $200 billion a year to fund its

current account deficit and maturing debts. The country currently has foreign reserves of $85

billion which is not sufficient to sustain as a nation. Consequently, significant investors of

Turkey are pulling out due to the present circumstance which fears them of not recovering
their money back as Turkey’s debts are expanding and Lira had a sudden fall in value that

made investors lose confidence and expectation.

LIRA CURRENCY CRISIS

Individuals in Turkey take apprehensive looks at foreign exchange screens, thinking about

how considerably less their money may now worth. Not just the buyers had a negative impact

on their income even the imports of dealers have a huge increment in expense and these

expenses are reflected in their prices. Turkey’s investment flow was already declining and the

political instability led the investors to take their money back. Another major factor was a

decline in Turkey’s currency Lira which has lost almost 40% of its value, making the

condition worse than before. As slowly investor lost their confidence in the Turkish economy

all wanted their investment back. Hence now the government has to pay more as already the

value of currency has depreciated a lot and as banks and the big industries also bought the

money from investors long ago when the currency has a good exchange rate but now, they

have to pay more as they need to convert their money into dollar and make repayment which

led to the worst situation for Turkey. The fall in the value of Lira against Dollar has a great

impact on other countries including India. Lira being among the most traded currency in the

world around 1.5% of total trade hence Lira has an impact on other currency exchange rates.
Source: https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-

rates/usd/USD-to-TRY

PRESIDENTIAL INTERFERENCE WITH THE CENTRAL BANK

Turkey has encountered generously higher inflation than other developing markets. In August

2017, inflation was at 13.9%, the most elevated rate since July 2008. In 2018, the Lira's

quickly weakened, achieving a dimension of 4.0 USD/TRY by late March, 4.5 USD/TRY by

mid-May, 5.0 USD/TRY by early August and 6.0 and 7.0 USD/TRY by mid-August. Among

financial specialists, the quickening loss of significant worth was for the most part ascribed to

Recep Tayyip Erdoğan controlling the Central Bank of Turkey from making the essential

alterations in interest rates. Despite Erdoğan interference with Central Bank the interest rate

is increased. Timothy Ash a financial analyst said that "Turkey has strong banks, healthy

public finances, good demographics, pro-business culture but [has been] spoiled over past

four to five years by unorthodox and loose macroeconomic management." He suggested that

under the current government, Turkey is encouraged to look for the assistance from
International Monetary Fund (IMF) before Central Bank reserves may run out which will

assist to stand against Erdoğan and gain the confidence of the investors back.

DIPLOMATIC RIFT AMONG USA AND TURKEY

Pastor Brunson is the character at the centre of this escalating spat which threatens to derail a

NATO alliance. He is an evangelical Christian Pastor from North Carolina who lived in

Turkey for years and was arrested in October 2016 on charges of terrorism. He questions

these charges but his arrest came in wake of an attempted coup and Tukey blames the USA

for holding the man that they believe is responsible for that coup. The USA saw this situation

of detention of Pastor as a part tit-for-tat hostage situation and claimed that Pastor is

absolutely blameless. In August 2018 when Pastor was let out of prison following two years

in jail on the ground of health issues and discharged into house arrest. The situation escalated

quickly when US President Trump said that this is unacceptable and Turkey must release him

fully otherwise, USA will levy sanctions if Turkey doesn’t.

Source: https://twitter.com/realDonaldTrump/status/1030235363258851328?s=20
 Source: https://twitter.com/realDonaldTrump/status/1027899286586109955?s=20

The USA multiplied the sanctions on aluminium to 20% and on steel to 50%. Extremely

personal and painful economic and humiliating diplomatic sanction. Erdoğan announced the

policy to boycott US electronic products as a backfire against the USA. Subsequently, the

relations between these two countries has made the situation worse for Turkey.

OTHER FACTORS

There are numerous factors that led to the crisis in Turkish economy like recently the stock

market has fallen around 17% and the borrowing cost for the government has increased by

18% a year. The inflation in the economy is around 18.4% which is another obstacle for the

economy. This has made the life of common man more terrible as basic commodities are

expensive and the value of Lira is falling continuously. The value of Turkey’s import is

higher than its export leading to negative trade balance almost $77 billion last year.
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