The decline in value of the Turkish currency has accelerated in the past week. If the central bank doesn’t take swift and bold action, consequences will be incalculable, according to Laurens Maartens of the Dutch Payment and Exchange Company.
Last week, the Turkish lira dropped significantly. On Monday, the currency temporarily dropped by more than five per cent when the US announced they would look into the duty-free import of goods from that country. This creates the danger that Turkish companies will soon have to start paying import duty for nearly €1.5 billion in goods. The report followed an announcement that Turkey will implement a levy on certain American goods, which is how the country responded to the import duty on steel introduced by the US earlier this year. Tensions between the countries had already risen because Turkey refused to release the American pastor Andrew Brunson.
Structural problem
After the recent depreciation in currency values, the lira is now worth just 16 euro cent. Late last year, this was more than 22 euro cent, and in the autumn of 2010, one lira even bought half a euro. The trade spat with the US has only accelerated this free fall. Even if Turkey succeeds in resolving the American trade conflict, the end of the lira’s free fall won’t be in sight yet. To that end, a more structural problem will first have to be dealt with.
Vicious circle
The value of the lira has been depreciating for years due to high inflation. In recent months, inflation shot up from just over 10 per cent to nearly 16 per cent. This considerable rise is partly the result of the value depreciation of the lira. As the Turkish government continues to wait before doing something, it’ll become more and more difficult to break the vicious circle of a declining lira and a rising inflation. The recently re-elected president Recep Tayyip Erdoğan, however, is an outspoken opponent of interest increases with which central banks are trying to keep inflation under control. In his opinion, increasing interest puts too much of a brake on economic growth.
Surprise move
In response to this sharp decline of the lira, the Turkish central bank has relaxed reserve claims for banks somewhat. However, this is just a drop in the ocean. Because of all of the uncertainty, interest on 10-year Turkish government bonds has already increased to nearly 20 per cent. In June, interest was increased by 125 base points. The next meeting isn’t until 13 September, but earlier this year the central bank showed that they’re willing to suddenly intervene should circumstances require this. If such a surprise move isn’t taken soon, the lira might soon be worth just 10 euro cent.