In today's Finshots we talk about Turkey and why their currency is in freefall

The Story

Nobody likes inflation. When prices rise, it upsets everyone. Look at how Indians are reacting to the march of pricey tomatoes. They want to go out on the streets and make their sentiments known. And unfortunately, it’s becoming a bit of a norm everywhere. Europeans are complaining about high electricity bills. Americans are complaining about pricey meat. And the Turks are complaining about pricey everything. Their currency, Turkish Lira is losing value quickly. In fact, it has lost nearly 40% of its value within a year. It now carries the ignominy of being called the world’s worst-performing major currency. And the plunge is largely thanks to the policies enacted by Turkish president — Recep Tayyip Erdogan.

Here’s what Mr Erdogan believes — First, keep interest rates low. This allows businesses to borrow at a more affordable rate and it gives them the room to grow and expand. And while this argument isn’t totally bereft of logic, it is problematic when your currency is already weak. The low interest regime has precipitated an excess of sorts. The Turkish currency is floating everywhere. And with investors losing confidence, they’re now dumping what little currency they held previously. And the Turkish lira is on a freefall.

Think about it — An excess of anything isn’t a good idea. Too much sugar is bad for you. Too much spinach is bad for you. Too much money is also bad for you. Because everything else being equal, that money will fail to hold value. It’s what triggers inflation.

At this point, any sound economist will choose to mop up the excess supply in the hope of stabilising the currency. They’ll jack up the interest rates and make borrowing a chore. In the past, it has helped Turkey and other countries to suppress inflation. However Mr Erdogan believes otherwise. He has been a long-time opponent of high interest rates and he hates it with passion. In fact, he believes the best way to tackle inflation is to keep interest rates low. He believes that economic growth precipitated by the low interest rates will help the country produce more goods and services. And this in turn will help tame inflation.

And in a bid to prove his hypothesis he is putting everything at risk.

As this article in the Economist notes —

“Many blue-collar workers, students and pensioners are no longer able to buy meat or basic household necessities. Attempts by the pro-government media to put a positive spin on this sound like cruel jokes. A television pundit recently celebrated the impact of the crisis on the minimum wage, which had sunk from the equivalent of around $380 monthly at the start of the year to $220, as a chance for foreign companies to move production to Turkey. One ruling-party parliamentarian helpfully suggested Turks should eat less.

For middle-class Turks, holidays abroad and scores of imported goods are out of reach. Many young professionals say they no longer see a future in Turkey. Since the start of last year, some 3,000 doctors are believed to have moved, mostly to Germany. Another 8,000 are planning to join them.”

But wait. Why is the Turkish president deciding interest rates? Isn’t that something the central bank does?

Yes, it is, but unfortunately, the central bank in Turkey lost its independence a long time ago. In functioning democracies, central banks play the role of watchful guardians. Guardians with high levels of economic expertise and wisdom, that can guide a country through choppy waters. They are trained to be patient and reflect upon developments occurring in the world as well as the country and act accordingly. They are transparent and usually invite a healthy level of debate and dissent. And accountability to the public. All of these attributes are necessary to avoid an economic crisis.

This is not happening in Turkey.

Instead, the Turks have to contend with an autocratic ruler who thinks he knows better. Since July 2019, Erdogan has sacked three central bank governors who tried to increase rates and fired any central bank official who had the nerve to question his policies.

And as such, with each passing day Erdogan’s “unorthodox” ideas are pushing Turkey to the brink of total economic collapse.

Until next time…

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