The Lira’s All-Time Low and the Looming Recession
By Benjamin Lutz
As a result of many factors, but especially lowering oil prices, the Turkish Lira in April 2020 has reached near to its all-time low of 7.23 Lira to 1 US Dollar from August 2018. COVID-19 has affected most every part of every country’s economy, but Turkey seems to be hit harder given the rapid fall of the Lira. Well before the outbreak of the pandemic, Turkey hit its first all-time low of 3.78 Lira to 1 US Dollar in January of 2017. The reasons for this initial drop have been linked to geopolitical tensions and security challenges, as well as the uncertainty of the beginnings of the Trump presidency. Few reforms were passed and the Lira stabilized.
However, in 2018, inflation spiked as a result of the tariffs on Turkish exports as well as the shifting perceptions of Turkish President Recep Tayyip Erdogan due to the constitutional reforms and governmental inaction towards rising unemployment. The volatility of the Lira in combination with Erdogan’s tighter grip on Turkish society has not been a stellar combination for Turkey’s economy. Although foreign investment and engagement in European markets did not slow down 2018–2020, the many factors surrounding Turkey have weakened the Lira’s value.
And on Tuesday, April 21, 2020, the Turkish Lira narrowly avoided the 7 mark by trading at 6.9991 Lira to 1 USD. However, its 1000th of a percentage point away from the dreaded 7 to 1 ratio shows that the Lira is the weakest it has been since the currency crisis. In a swift reaction to lower the 6.9991 rate, Turkish government-owned lenders sold at least $300 million to support the currency while promoting other interventionary measures.
Its largest move happened on Wednesday, April 22, 2020, when Turkey’s central bank cut interest rates to 8.75 percent, risking further Lira weakness, in a bigger-than-expected move aimed at limiting the economic damage of the COVID-19 crisis. This fairly drastic measure highlights the central bank’s overriding objective is to support economic growth and it is willing to make sacrifices on the Turkish lira, as well as on financial stability and price stability considerations.
The central bank has used up nearly all its foreign currency reserves, net of liabilities, after it engaged in currency swaps with state-run banks in recent months. Its reserves of dollars and euros stand at less than $1 billion, according to official data. Many global experts are saying that these newly imposed import levies would provide only temporary relief without addressing the core problem, which is weak domestic demand. The rate cut largely makes the Turkish Lira even less attractive which raises the risk for the financial system in the country because the Lira is already under pressure.
Furthermore, it seems likely that Turkey will need assistance from the International Monetary Fund, but Ankara officials have so far ruled out the option. It’s a missed opportunity for Turkey not to take advantage of this at a time when additional external funding would facilitate Turkey’s transition out of this situation. Turkey is still the largest economy in the Middle East and is rapidly tilting into its second recession in less than two years.
The future of the Turkish economy is now largely dependent on the subsiding of the COVID-19 outbreak. As Ramadan has now begun, the Turkish Interior Ministry issued a ban on mass meals during Ramadan, adding to other measures in place to stem the spread of coronavirus that include a sequence of weekend curfews in major cities and a four-day lockdown. The developments come as Erdogan confidently stated that the pandemic was “Nearing a plateau in Turkey. We aim to achieve maximum observance of measures during the month of Ramadan and, God willing, a transition to normal life for our country after the holiday,”
The massively slashed prices of oil, reduced rates from the central bank, high unemployment, and dependence on imports all combined leads to the necessity of outside assistance like the IMF. Turkey may already be in the first stages of its second recession as a result of all these factors in addition to the COVID-19 outbreak. Erdogan’s optimism may be the only tangible thing that will reinvigorate the Lira and Turkey’s economy.