Turbulent week for Turkish economy, is the lira to save?

The Turkish economy and the Erdogan family have had a turbulent week, which began when President Erdogan sent out the chief of the central bank on Saturday morning. Then followed the Minister of Finance, Berat Albayrak, who himself announced his departure. He did, highly unusual and completely unexpected, in a post on Instagram.

Albayrak is not only minister but also Erdogans son-in-law, married to his daughter and father of four of his grandchildren. Albayrak said to leave for health reasons and to be able to spend more time with his family. There are few Turks who believe that.

Later in the week it became clear that Albayrak probably felt passed by the sudden change of power at the central bank. And that Albayrak cant go through a door with the new Erdogan appointed bank governor. No one knows how the relations are in the family.

Worth 30 percent less

The fact that the Turkish economic summit had to go ahead has everything to do with the economic crisis that the Turks have been experiencing for several months now. The currency, the lira, has lost 30 percent of its value since the beginning of the year. And if the Turkish citizens money becomes less valuable so quickly, it will lead to unrest in society. Many people are struggling to make ends meet because of the rising prices in the supermarket. They were barely scrapped out of the Lira crisis of 2018, and the coronapandemic caused an extra blow.

The fish and vegetable market in the Kadiköy district of Istanbul can be seen. Lemons at fruit seller Avat have recently become 50 percent more expensive. He rolls three golden lemons over his palm. “They were 10 lira per kilo, now we have to sell them for 15 lira,” he says.

And so is the fall of the lira the talk of the day in Turkey, says Mitra Nazar in this report:

Tomatoes and pomegranates have undergone the same price increase. It has to do with the higher cost of transporting them from southern Turkey to Istanbul. “Petrol, labor costs, everything has become more expensive,” says Avat. For a long time he tried to keep the price down, but now he could not do anything else. “I had to.”

A young woman, a civil servant at the congregation, leaves the lemons. “Its just too expensive,” she says. “They say we have to eat vitamins just now because of the pandemic, but who can afford it?”

Turks still have fresh memories of the lira crisis of 2018. A trade war with the United States led to a currency crisis. Foreign investors lost confidence in the Turkish government. Purchasing power fell sharply, the government sold subsidized vegetables, fruits and bread on the streets.

Conflicts lead to declining confidence

This year it is also diplomatic quarrels that have not done the lira any good. Erdogan has disagreement with the EU over gas and oil finds in the Mediterranean; a conflict with Greece over high maritime borders. Erdogan has continued criticism of Turkish involvement in conflicts in Libya, Syria and Nagorno-Karabakh. Brussels threatened with sanctions earlier; this week the Netherlands called for an arms embargo.

It creates less confidence in the coin. In addition, doubts about the independence of the central bank, which also played a role in the crisis of 2018, have not been resolved. For years it is believed that the boss of the bank can not do anything without the consent of the president.

“ President Erdogan is someone who does not like to listen to others. We see him as a leader who believes only his own truths,” says economist Selcuk Gecer. “This has led to a wrong economic policy, which is why we are now heading for an unprecedented deep economic crisis.”

The fact that Erdogan put the bank manager on the street when the lira had fallen to a deep record shows that the crisis is now being taken seriously, says Gecer. “Economic problems lead toto losing voters. After the previous crisis, the opposition won the countrys largest cities. That had everything to do with the economy. Erdogan is certainly aware of that.”

Yet more is needed to pull the lira out of the slop. Turkey needs to raise interest rates, which is what most economists agree. Only then will financial markets regain confidence. But Erdogan is not in favour of that. He wants low interest rates so companies can borrow cheaply and continue to invest. The construction sector in particular has benefited from low interest rates in recent years.

Erdogan said on Tuesday that Turkey is struggling with those who want to force Turkey to surrender with interest rates, exchange rates and inflation. He is committed to other measures, such as stimulating domestic production. “With production, investment,employment and export-oriented development we will continue our path.”

Whether the new head of the central bank will decide to raise interest rates is not yet clear. After the change of power at the economic summit, the lira immediately rose in value against the dollar, which may indicate that the financial markets expect concrete measures to arrive. But if interest rates remain low, the lira will continue to fall into course.

The next interest meeting will take place on 19 November. Then it becomes known what measures are being taken to save the lira.