Turkey is going through a very unusual currency crisis. The collapse in the lira’s value — down by about a fifth over the past two weeks — has not been caused by problems in the country’s economic fundamentals as it has in the past. The country, which has long suffered from a current account deficit, posted a surplus for the second month running in September thanks to a huge surge in exports and a recovery in foreign tourist numbers. Instead, the currency’s troubles almost entirely reflect the increasingly erratic decision-making of one man and the influence he wields over the supposedly independent Turkish central bank: president Recep Tayyip Erdogan.
Erdogan blames outside forces for the drop in the value of the lira. But the latest problems began in March of this year after he fired the head of the central bank Naci Agbal. The respected technocrat was the third governor to lose his job in two years. The appointment of the Erdogan-loyalist Sahap Kavcioglu led to the lira dropping 15 per cent shortly afterwards, before it recovered somewhat. The drop then became precipitous earlier this month after the central bank cut rates for the third time in as many months.
It is true that emerging market currencies generally have performed badly against the dollar this year. Expectations that the US Federal Reserve will soon begin reducing its programme of asset purchases, designed to support the economy and the financial sector through the coronavirus pandemic, has led to an appreciation of the dollar. Footloose capital that has sought a higher rate of interest in developing countries is now returning home. As the Pakistani central bank governor said in an interview with the Financial Times last week, poorer countries with high levels of foreign currency debt are at risk if sentiment shifts.
Against that backdrop Erdogan’s conspiracy-mongering and authoritarian tendencies play even more badly than usual. While he has long rallied against what he calls an “interest rate lobby”, he has also been a wily pragmatist, ultimately allowing the central bank to raise interest rates during previous episodes of currency volatility. This time, he appears determined to follow through on his ideological commitment to low interest rates, saying at the start of last week that Turkey was engaged in an “economic war of independence”.
Opposition parties are optimistic that Erdogan is in his last years in power, and elections scheduled for 2023 will bring the vicious spiral to an end. Erdogan’s popularity is fading as higher prices eat into living standards. When he was first elected, his Islamist party promised an era of growth and steadily rising incomes. For many years he delivered, partly thanks to an IMF programme that his government inherited and, later, a construction boom that has now faded. Indeed, memories of that era of debt-fuelled growth may lie behind the president’s continued support for cheap money. That is just one tool out of many at his disposal to try to remain in power.
The saga may have an even unhappier end. Inflation is already running at an annual rate of 20 per cent, which means real interest rates are around negative 5 per cent. If the president continues to pursue a programme of interest rate cuts then the lira will fall further and prices will inexorably rise. In those circumstances the only way for Turks to defend their savings will be to turn to a currency outside Erdogan’s control. Unless he suddenly changes course, the only question facing Turkey, a country with great potential, is how much longer the president will stay — and how much damage he can do before he goes.