August 9, 2022

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Turkey: Erdogan saves Turkish lira from sinking into terror – 12/21/2021 at 4:43 pm

In front of a transfer office in Ankara on December 20, 2021 (AFP / Adem ALTAN)

In front of a transfer office in Ankara on December 20, 2021 (AFP / Adem ALTAN)

The Turkish lira rebounded sharply in the foreign exchange market on Tuesday, following emergency measures and a month of historic losses announced by the head of state.

On Monday evening, after a tumultuous session, President Recep Tayyip Erdogan surprised markets and his opposition by deciding to link the value of some bank deposits to the dollar in pounds.

Economists and many Turks have been trying to understand how this new trade mechanism works and where the government is getting the money for it.

But the impact of the Turkish lira, which lost 45% against the Greenback from early November until Monday afternoon, was significant.

When Erdogan appeared on television after the weekly government meeting, the currency fell further by 10% and traded up to 20% against the dollar a few hours later.

“In the end, Erdogan’s management cared about the exchange rate and avoided capital restrictions,” Timothy Ash, an economist at Blu-ray Asset Management, said in a statement on Monday. The president “has shown that Erdogan is confident in the markets, but not in interest rates.”

– Indirect tariff hike –

On November 24, 2021, Recep Tayyip Erdogan and Governor of the Turkish Central Bank in Ankara Sahap Kavcioglu signing agreements with Crown Prince Mohammed bin Saeed Al-Nahyan (AFP / Adem ALTAN) in Abu Dhabi.

On November 24, 2021, Recep Tayyip Erdogan and Governor of the Turkish Central Bank in Ankara Sahap Kavcioglu signing agreements with Crown Prince Mohammed bin Saeed Al-Nahyan (AFP / Adem ALTAN) in Abu Dhabi.

Instead of controlling inflation by lowering high interest rates, the head of state used Islamic decrees to promote inflation – contrary to widely accepted economic principles – and to restrict interest rates in order to maintain his beliefs.

In recent months, he has pushed the central bank four times a year to lower its core interest rate, far from the level of inflation that hit 21% in November.

This means that Turks who deposit books in their bank accounts effectively lose money every month. Economists fear the country’s banking system could be paralyzed if there is a banking emergency.

Erdogan’s new policy – called “indirect interest rate hike” by former Treasury adviser Mahfie Ekhilmes – will protect the value of the pound’s reserve against exchange rate fluctuations.

If there is any depreciation in the bank deposit in pounds against the dollar, the government guarantees the people that it will compensate by making periodic payments.

“If the exchange rate increases by 40% and the interest rate increases by 14%, 26 points of the difference will be compensated,” Egilmes explained on Twitter.

However, the finance ministry warned in a statement that the money should be kept in the account for at least three months.

At a market in Istanbul on December 21, 2021 (AFP / Ozan KOSE)

At a market in Istanbul on December 21, 2021 (AFP / Ozan KOSE)

This policy is intended to reassure Turks when they deposit books in a bank.

The move helped reassure people that the market would not fully stabilize: the Turkish lira gained another 22% at the start of Tuesday, rising a few points at the end of the day, before continuing to wipe out all these gains.

Tuesday night, it took பவு 13 to buy a dollar. But the Turkish currency has lost 40% against the dollar since the beginning of the year, despite a sharp recovery from its all-time low of nearly 40% in recent hours.

However, many economists are wondering whether President Erdogan’s new approach – which seeks to straighten out the half-mast estimate ahead of the 2023 presidential election – is sustainable.

“The deposit guarantee will increase the burden on the public,” Ali Babak, Turkey’s former finance minister, told reporters. “The public treasury pays taxes: it’s the dollarization of the country’s economy.”

Economists have also questioned the effectiveness of the decision in protecting the purchasing power of the Turks.

“These measures will probably save time and avoid an immediate downturn in the banking sector without doing anything against inflation,” Tim Ash said.

According to capitalist economist Jason Dwayne, this is “a sign that leaders are trying to find a way to live at a weak pound, but not back to tradition.”

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