By George Koumoullis
IN THE LAST few months, the Turkish Lira (TL) has lost 42 per cent of its value against the euro. The fluctuation of the exchange rate of a currency changes continuously, often by the minute, and is determined by the forces of supply and demand.
If on a specific day, a group of individuals, institutional investors, speculators and governments decides to buy currency X and the amount they want to buy exceeds that of another group (with same composition as the first) that want to sell then the demand for currency X would be bigger than the supply and its price is pushed upwards; the price is pushed downwards if the sellers offer more than the buyers demand.
Perhaps I should mention the significant role played by the speculator – the profiteering opportunist – as was illustrated in the case of the US pastor Andrew Brunson who was being held in prison in Turkey. While it was expected he would be released on 25 July, he was placed under house arrest. Anticipating retaliatory measures by the US government (which were taken) that had demanded his release, many decided to sell their Turkish Lira, thus increasing the supply.
The battering of the TL was continued after President Donald Trump imposed sanctions on Turkey’s ministers of justice and interior for their role in the arrest and imprisonment of Brunson. As if this were not bad enough, new fronts were opened after the Americans imposed new tariffs on aluminium and steel imports from Turkey and Ankara responded with its own tariffs on US goods.
There are also other important reasons for the tumbling of the TL. The inflation rate in Turkey is now 16 per cent while in the countries with which it does the bulk of its trade, the EU and US, the rate is 2.2 and 1.9 per cent respectively. This erosion of competitiveness means fewer exports (therefore fall in demand for TL) and increase in imports (rise in the supply of TL). In other words, the deficit in its current account balance contributes to the devaluation of the TL.
In a normal secular state such a trend would have pushed the central bank (which would have been independent and not under the complete control of the President as is the case in Turkey) to increase interest rates in order to reduce borrowing, consumption and imports. If this happened, the fall of the TL could have been curtailed, but President Erdogan refused to discuss a further increase of interest rates which he considers the “the mother and father of all suffering”. Interest rates are currently 16 per cent, but need to be more than 20 per cent to have an effect on inflation of 16 per cent. There are two possible explanations for this: either he is illiterate in economics if he believes high interest rates would fuel inflation or he is influenced by the teachings of Islam, which considers any form of interest rate as usury.
Whatever the reasons, economists are mocking his stance. This stance is reminiscent of the absurdity of the Persian King Xerxes who, infuriated by the rough seas that prevented his army from crossing the Hellespont and invading Greece, “punished” the seas by making his slaves flog it 300 times and throw chains in the water to subjugate it.
Another important reason for the tumbling of the TL was the big inflow of foreign capital into Turkey as a result of the low interest rates in the US and EU. Foreign investment in company bonds, banks and shares increased dramatically and helped the impressive growth of Turkey’s economy while, at the same time pushing to extreme heights the country’s short-term foreign debt. Now foreign investors are questioning the ability of Turkey to service this debt. It is already being rumoured that Turkey has no other option from imposing capital controls and suspend debt payments, or even seek the help of the IMF. In addition to this, Erdogan’s increasingly autocratic behaviour discourages the inflow of capital to Turkey. Investors are usually put off by dictators that are by nature unpredictable.
The rational thing to ask is why Turkey’s central bank has not intervened to prop up the TL? Unfortunately for Turkey, this is not possible because its foreign currency reserves, with which it would buy TL, are very limited.
The TL’s freefall is a huge blow for the Turkish Cypriots. The latest figures show that inflation in the ‘TRNC’ is 20.3 per cent and it is forecasted to rise significantly. And as they do not have a cost of living allowance to protect wages, the rapid fall of our compatriots’ purchasing power is unavoidable. Unfortunately, the hands of the Turkish Cypriots are tied as, economically, they depend completely on Turkey… they are the victims of Erdogan’s insistence on not raising interest rates to fight inflation.
Another big blow for the Turkish Cypriots is that while they are paid in TL, expensive goods such as cars, furniture houses and even rents are priced in pound sterling, euro or dollars. Consequently, the price in TL of all these goods have sky-rocketed in the last few months. In order to deal with this problem, the so-called government imposed a fixed exchange for the TL with regard to rents and school fees.
There are people benefiting from what is happening in the north. A convoy of cars crosses north every day as Greek Cypriots take advantage of cheap petrol, cigarettes and other items paying in the hard currency Turkish Cypriots are desperate for. The most important thing, however, is that the Turkish Cypriot elite is coming to terms with the realisation that only a Cyprus settlement would ensure against such crises. If this ordeal they are going through brings the two sides closer to a deal it would prove a blessing in disguise.
George Koumoullis is an economist and social scientist