A SELF MADE CRISIS
By Nikita Bhardwaj, Kalindi College
Imagine standing in long queues at a supermarket only for it to give you bread for a single rupee. Imagine having a job but your employer is leaving you on an arrear for months continuously. Or even worse, what would happen if all your savings turned to dust? The people of Turkey are striving to get through an exactly similar situation. They are finding it gruelling to make ends meet as even the prices of essential items like milk, bread, toilet paper are skyrocketing.
But what led to such exorbitant levels of inflation in Turkey?
The Turkish Lira (TYR) has plummeted to more than half of its value against the dollar over the past two years from 4.84 TYR against one dollar in 2018 to 14 TYR against a dollar in December 2021. Moreover, it has lost a whopping 40% of its value since the beginning of this year, becoming one of the worst performing currencies in the world. In 2014, it took 2 liras to buy a US dollar but now it takes 14 liras to buy a US dollar. The Turks have lost trust in their currency and are now finding ways to trade their savings for gold and dollars. To understand the roots of this crisis, let us dive into the policies of the authoritarian president Recep Tayyip Erdogan.
Beginning from September of 2021, President Erdogan has continuously pressed to cut interest rates despite the surging consumer prices. Contrary to what economists say, Erdogan has always believed that large interest rates cause inflation. Thus, he has been ordering the central bank to reduce the borrowing cost and curtail interest rates on savings. His argument is that low interest rates will inject money into the economy, thereby augmenting Turkey's economic growth as well as its export potential. Mr Erdogan believes that low interest rates will be instrumental in bringing down inflation while high interest rates are the reason prices in the economy rise as they add to costs. He sees high interest rates as ‘an evil that makes rich countries richer and poor countries poorer.’ So according to Erodgan, a central bank can print unreasonable amounts of currency and bring prosperity among people. However, to President Erdogan's dismay, citizens of his country are struggling to even afford a one time meal at these prices. Such low interest rates are leading to an ever increasing supply of liras, while due to a limited supply of goods, the value of lira is declining rapidly. According to World Bank data, Turkey’s money supply rose by about three and a half times between 2014 and 2020.
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| Image Source:https://www.middleeasteye.net/. |
One must ponder that as a country leader, Erdogan must have the best economists of the country to assist him in policy making. But Erdogan has time and again reiterated that there will be no turning back from his unconventional policies. In the past two years, he has dismissed three central bank presidents and changed the finance minister because these people have gone against his ideologies.
The deepening of this currency crisis can also be attributed to the large current account deficit of the country. This means that the value of Turkey’s imports is much higher than the value of its exports. Traditionally, foreign investors have been helpful in financing this deficit. However, due to the skewed and unpredictable foreign exchange rate, foreign investors are reluctant to make investments and are dumping Turkish assets as a weak exchange rate will prove to be a hindrance when they try to convert their money to dollars. Another pressing question that arises is about the independence of the central bank as the institution is not left with any discretionary power of its own for the welfare of its people rather it has been relegated as a mere puppet of the government. The lira, however, recovered a bit when the central bank stepped in to stem the volatility. While experts all over the world are not buying Erdogan’s monetary policies, he thinks his government is devoted to an ‘economic war of independence.’
The plunging currency is a cause of serious concern for the Turks as well as the future economy of the country. According to Selva Demiralp, economics professor at Istanbul’s Koc University, the country might witness brain drain in the near future. This is because the salary gap between what people can earn in Turkey versus what they can earn abroad is lucrative enough for these educated people to move abroad.
How this crisis might disrupt the supply of our favourite Nutella?
The unfortunate effect of this economic crisis and absurd monetary policy is on the world's largest hazelnut industry which caters to the global supply of Nutella. The cost of fertilisers has soared from 215$ a ton in 2020 to 650$ a ton in 2021 which has made farming expensive and some farmers are shutting work and going to work in textile factories. This has led to an erratic supply of hazelnut. 70% of the world’s supply of hazelnut comes from Turkey and the brand which makes Nutella buys a major proportion from Turkey itself. In the words of Turgan Zülfikar, an export consultant for Turkish companies, "The world is on the verge of hazelnut shortage, if you are a Nutella fan, you better stock up at your next food-shopping visit."
While the lira was rapidly setting new records at depreciation, the president finally came up with something different. Facing a crisis of their own making, on 20 December 2021, the government announced that shareholders of lira deposits will be compensated whenever the depreciation tops the interest rates offered by the banks. This means that the difference between the depreciation and interest rates will be the amount of money that goes into the pockets of lira holders, owing to the country’s treasury. The lira recovered phenomenally, moving from 18.36 to as low as 11.11 against the dollar, its biggest rally for nearly four decades. However, experts suggest that this policy is not sustainable at all as it will lead to an increased burden on the treasury. There are apprehensions that it might further worsen the situation and the central bank might have to print currency to reimburse lira depositors. Analysts expect that inflation can reach around 50% in the first half of the upcoming year.
In stark contrast to Erdogan’s monetary policies, let us take a look at how governments and central banks all over the world respond to such an economic slowdown and inflation:
Over the past two years, many countries have suffered from similar problems due to the pandemic. During an economic slowdown, economists advocate lowering interest rates in order to stimulate the economy. The low interest rates make taking loans more viable and simultaneously discourage savings. This increases the liquidity of money in the market.
It provides people with the money they need to finance purchases. But once an economy starts to operate at full capacity and overcomes recession, further lowering of interest causes inflation.
In case of inflation, central banks increase interest rates which in turn decreases the money supply as credits are not a viable option anymore. Thus, those who have money want to keep it and save it, instead of spending it as it is more profitable to reap high interest rates. The key to reducing inflation is to curb the purchasing power of people.
Therefore, providing compensation to people with the depreciation of liras is a policy that President Erdogan must rethink upon in order to have a sustainable economy for his country.
References
https://indianexpress.com/article/explained/turkey-currency-crashing-us-dollar-turkish-lira-7658461/
Very well written Nikita!
ReplyDeleteGreat article Nikita! Keep up!
ReplyDeleteHad me engaged in it through out! Amazing stuff nikita
ReplyDeleteQuite an informative and intriguing one!
ReplyDeleteGreat information shared in an interesting way!!Keep it up!!
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