Like most readers of this article, I am not a financial expert and do not claim to be one, but one doesn’t require a PhD in economics to realise that there is something drastically wrong with the Turkish Lira.
Over the years, everyday Turks have been watching on as prices of basic goods and amenities skyrocket. Meanwhile, Turkish newspapers continue to print headlines such as ‘Dolar Yükseldi!’ (The Dollar has Risen!) or ‘Dolar Yine Rekor Kırdı!’ (The Dollar Breaks Another Record!).
It’s not uncommon in Turkey to hear locals oft-repeating hyperboles such as ‘dolar uçtu’ (the dollar is flying) or ‘dolar patladı’ (the dollar has exploded) as they try to make sense of the hikes. But such remarks, despite being idiomatic, are actually ill-informed, subjective and deflective.
In reality, nothing has happened to the dollar. The dollar, being the world’s most stable currency owing to it being backed by big business and petrol, is the same dollar it was yesterday.
However, although it may appear to Turks that the dollar is ‘flying’, what’s really happening is that the Turkish Lira is falling, and it’s falling fast.
But very rarely does anyone see headlines in Turkey that read ‘Lira Düştü!’ (The Lira has Fallen!) or ‘Lira Çöktü!’ (The Lira has Collapsed!).
Such headlines would awaken Turks to the reality that the reason for their economic crisis isn’t because of external factors outside of their control. They would realise that the crisis is due to internal failures that need addressing and rectifying.
Of course there are plenty of Turks who are well aware of this reality, and who are conscious of the fact that these deflective headlines in their newspapers merely serve to soften the blow of what is, without a doubt, a depressing situation.
Perhaps the aim of such headlines is to keep public morale as high as possible, but the media can only do so much to cover up the mistakes of the government’s economic policy before people, who are increasingly struggling to afford their weekly shopping, start asking questions.
As of today, $1 is more than 15TL. This time last year, the dollar was around 7.50TL. The Turkish Lira has therefore halved in value in the last 12 months.
To put it into further context, the 50 kuruş coin (0.50TL) is no longer worth the scrap metal it's minted on. If the value of the Turkish Lira continues to drop, which is more than likely, Turks would be better off converting all their hard cash into 50 kuruş coins and selling the metal tokens for their scrap value.
Why is the Turkish Lira falling?
Well, first of all, the devaluation of the Turkish Lira is not actually in itself a bad thing. Many countries intentionally devalue their own currencies for multiple reasons. One such reason is to make domestic produce a cheap and lucrative option for foreign buyers.
When this is the case, currency devaluation leads to a boost in exports, and this tends to offset any losses incurred by the devaluation and even contribute to overall economic growth.
In a sense, this has worked, because despite the troubles it is going through, Turkey’s economy is actually still growing. But the problem plaguing Turkish society is not the devaluation of their currency, it’s inflation.
Inflation currently stands at over 20 percent, with forecasts suggesting it could hit 25 percent by the end of the year.
If Turkey was able to maintain a healthy inflation rate of 1-3 percent, then the devaluation of the Turkish Lira would not be such a problem. Prices would rise in line with wages, and people would have the same purchasing power they had before.
Turkey could get its inflation rate under control by raising interest rates, which despite putting many people struggling to pay back their loans at a disadvantage, would help the country get a grip of the situation.
However, Turkey’s President Recep Tayyip Erdogan for some reason believes that there is a way to fix the economy without raising interest rates, and seemingly won’t listen to anyone who tells him otherwise.
Usually it would be Turkey’s Central Bank that independently sets the interest rate, but in the past two years, three Central Bank governors have either been directly removed or pressured into resigning by Erdogan for not subscribing to his vision of keeping interest rates low. That includes those who he initially appointed for the purpose of realising that vision.
Erdogan’s meddling in the Central Bank has of course shaken investor confidence, which means less foreign business coming Turkey’s way, less money circulating within Turkey, and less money being converted into Turkish Lira. Likewise, as Turks witness a decline in their purchasing power, foreign investors already in the country are no longer making enough money to justify their investments and are pulling out, which by consequence is undoing much of the economic progress that Erdogan's government made in the past.
In addition to the Central Bank governors being pushed aside for opposing Erdogan's policy, two finance ministers, including Erdogan's son-in-law Berat Albayrak, have also resigned since November 2020. Before stepping down last year for ‘health reasons’, Albayrak was accused of burning through the Central Bank's $128 billion foreign exchange reserves during his two-and-a-half-year tenure, which he injected into the market to stabilise the currency.
While Albayrak's strategy may have slowed the collapse of the Turkish Lira, the Turkish government failed to come up with an effective way to reverse the currency's cycle of doom.
Government failings
The currency devaluation was an ample opportunity to promote Turkish exports to the world, but the issue is, Turkey does not export enough to keep its economy afloat. The country is too dependent on foreign investment.
Perhaps what some of Turkey's policy-makers had originally envisioned was turning Turkey into an exporter nation like China, where the currency is low and the export of cheap goods is high, but Turkey doesn’t produce nearly enough as China does to deploy such a strategy.
Saying that, Turkey has become more imaginative and ambitious in what it does produce in the course of Erdogan's 20-year rule. Turkey now has its own cars, smartphones, helicopters, tanks and weapons, including the infamous Bayraktar attack drones.
But ownership and assembly are not enough to qualify Turkey as a producer nation. The truth is, many of the parts required to produce these things are imported from abroad, and if inflation is not brought under control, Turkey will no longer have the money to import these parts.
Maybe by closing Turkey off to the rest of the world, the Turkish public will be forced to learn how to become more industrious, much like the Germans and the Japanese did after they were defeated in World War II and their economy was obliterated.
Such a rebuilding process would no doubt take decades, but the end result would be Turkey developing a more intrinsically strong, self-sufficient, and resilient economy.
Turkey would no longer be so dependent on foreign investment, which so often goes hand-in-hand with geopolitical submissiveness, to maintain itself.
But the question is, do Turks, who are struggling to feed their families, have the patience to wait so long? It is often difficult to preach rationality and long-term strategy to people who are hungry today, especially when they know there is a quick-fix solution in simply implementing more orthodox economic control methods that would restore some level of dignity almost overnight.
The Turkish public have for better or worse trusted Erdogan throughout much of his reign thus far, but he might find in the 2023 elections that he doesn’t command as much loyalty as he thinks.
Erdogan might be basing his overestimation of the Turkish public's will to see out his vision on his past successes, but one thing he might be missing in his calculations is that his past victories often correlated with visible economic improvement. Now that Turks are no longer seeing those improvements, his approval ratings have dropped to an all-time low.
If this trend continues, Erdogan is unlikely to stand a chance in 2023. Public discontent might even force an early election in 2022.