Depreciation of Turkish Lira distresses government

When Turkish President Tayyip Erdoğan began a new wave of statement against the Central Bank on Jan. 16, roughly one-and-a-half months ago, one U.S. dollar was worth 2.30 Turkish Liras (TL).

That was already a high figure. While arranging their 2015 budgets at the end of 2014, almost all major companies in Turkey had based their estimates on a yearly average of 2.4 liras to the dollar, relying on government extrapolations. That limit was surpassed by Jan. 30.

There are external factors such as the global appreciation of the dollar, but it is not a coincidence that whenever Erdoğan slams the Central Bank and its governor Erdem Başçı for not lowering interest rates further, or whenever he criticizes Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Şimşek for not putting more pressure on the supposedly independent institution, the lira loses more value.

Yesterday, March 5, the value of one dollar approached 2.60. That was one of the thresholds for Turkish banks to back their guarantees without additional funding.

But it also means that the actual devaluation of the lira against the dollar over the last one-and-a-half months is nearly 12 percent.

There is more. When the lira depreciated against the dollar from the 1.80s to the 1.90s - roughly 10 kuruş or one-tenth of a lira - during the month-long Gezi protests in June 2013, Erdoğan said the protests had been instigated and manipulated by an international “interest rate lobby” in order to make the lira less valuable.

Since Gezi, the lira has lost its value versus the U.S. dollar by more than 40 percent. That 40 percent is the same amount as the losses that occurred over a few days in February 2001, which was caused by the largest financial crisis in Turkey’s history. It was that crisis that caused the collapse of the coalition government and brought Erdoğan’s Justice and Development Party (AK Parti) to power in the early elections of 2002.

Today the same number of Turkish people is becoming poor, but it is taking place over a longer period of time - nearly two years rather than the trauma of a few days. Its negative effect on the purchasing power of the Turkish people is the same, but now it’s like the story of the frogs being boiled slowly in water, rather than being thrown straight into boiling water.

The depreciation of the lira might seem attractive to exporters, but because of the changing nature of Turkey’s export-oriented industries, which have begun to rely less and less on native input, (mainly because of cheaper Chinese support), the country has started to rely more on imports in order to carry out exports, thus losing money in any case.

While all this is going on in the Turkish economy, Prime Minister Ahmet Davutoğlu, together with his economy deputy and finance minister, is in New York to tell investors there that Turkey is a profitable market for them and also stable, because his party is going to stay in power after the June 7 elections.

It may be true that an accelerating dollar versus the lira is profitable for foreign investors, but the figures are starting to be alarming regarding the endurance of the Turkish financial system, and the Turkish people.