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Current Affairs

Turkey’s currency crashing

Date: 08 December 2021 Tags: Miscellaneous

Issue

Turkish currency Lira has been plunging to all-time low against the US dollar and the euro in recent months.

 

Background

The currency has lost 40% of its value since the start of the year, becoming one of the worst-performing currencies of the world.

 

Details

  • President Erdogan has been insisting on cutting interest rates despite surging consumer prices. Citizens are struggling to buy food and other goods.

  • Inflation has accelerated to 20% in the last few months but the central bank cut interest rates by 4 percentage points.

 

Occurrences

  • Foreign investors have been worried due to unconventional monetary policy, and have dumped Turkish assets.

  • Citizens are hurrying to convert their savings into gold and other foreign currencies to protect them from soaring inflation.

  • As a result of low demand, Lira has been weakening against dollars. It had barely recovered from an economic crisis in 2018.

 

Effects on people

  • People are struggling to make their ends meet. The prices of basic goods have escalated beyond controllable limits.

  • The devalued currency is making import of goods dearer. Everyday material and raw materials have impacted end goods production in the country.

  • There is also a possibility of brain drain. Qualified and educated professionals are making efforts to relocate to European countries.

 

The response by President

  • President Erdogan has been arguing that high interest rates are increasing inflation, contrary to the views of economists who insist on increasing interest rates to counter inflation.

  • Erdogan expects that his policy will stimulate economy, boost growth and exports, and create jobs. He has promised to break vicious cycle of economy.

  • He has accused foreign governments for trying to wage an economic war with Turkey and destroying the country’s economy.

 

Political implications

  • Soaring consumer prices have hurt Erdogan’s popularity even among his ardent supporters. Protests have been taking place in major Turkish cities.

  • Opposition parties have formed a bloc against Erdogan’s party and are demanding for an early election.

  • The further escalation of inflation and deterioration of economic situation will be detrimental to Erdogan’s re-election bid in 2023.