The Issue Regarding Turkey’s Lira
The month of Aug. has witnessed a tremendous depreciation of Turkey’s currency, the lira. To be precise, the lira has lost more than 34 percent of its value against the dollar. In an effort to combat this downward spiral, Turkey’s central bank bolstered interest rates to a staggering 24 percent. Economic theory proves that high-interest rates lure foreign investment which in turn increases the demand and value of the domestic currency. The gain in value, however, was minimal as the lira is still 38 percent down percent down against the dollar.
There are many speculations about this sudden deterioration in Turkey’s financial status. One argument points at the economically restrictive sanctions that the US has implemented due to the detainment of pastor Andrew Brunson on Oct. 2016. On July 26, 2018, Vice President Pence made a call to order the release of Brunson. The call was in vain and the sanctions were subsequently imposed.
On July 26 itself, the U.S. Senate Foreign Relations Committee passed the “Turkey International Financial Institutions Act,” which essentially limited loans from international financial institutions to Turkey. This ultimately hindered the trade volume in Turkey, surpassing $20 billion.
President Trump tweeted, “ The United States will impose large sanctions on Turkey for their longtime detainment of pastor Andrew Brunson.”
Vice President supported the President’s decision to impose sanctions, adding that “sanctions on Turkey [will continue] until this innocent man of faith is free.”
The new dynamics of U.S.-Turkey relations contrasts their previous relationship in 2017 where Turkish imports to the U.S. increased by 30.7 percent.
Of course, such sanctions were not warmly received in Turkey. Ibrahim Kalin, the Turkish Presidential Spokesperson, stated: “ It is not possible to accept threatening language used towards our country, which is a NATO ally.”
Turkey is now experiencing a sharp division in decisions pertaining to monetary policy. The central bank’s decision to raise interest rates stood in sharp contradiction to President Erdogan’s views. President Erdogan is known to be against the rising interest rate, and has called himself an “ enemy of interest rates.” Many experts are surprised at the President’s remark, especially considering Turkey’s exorbitant interest rates. Some people that the President does not completely understand the role of interest rates in stabilizing the economy. Others believe that Erdogan’s anti westernization views compel him to reject the notion of increasing interest rates.
However, economic theory suggests that a rise in interest rates was perhaps necessary in order to restore confidence in foreign investors. Investors from other countries could borrow their local currency and invest in Turkish foreign markets and potentially make a substantial profit due to the high-interest rates. Although tourism is climbing an ascending path for Turkey, an increase in foreign investment and improved in trade relations will be imperative for the lira’s recovery.