Turkish President Recep Tayyip Erdoğan on Monday announced that his government will reimburse the account holders at Turkish banks who have been damaged by the depreciation of the Turkish lira. International investors found the announcement to be very reassuring, as Erdoğan actually promised that the money that the Turks deposited with national banks in Turkish lira or funds from the state reserve.
Monday is just the latest in a series of steps very turbulent for the Turkish economy, a story that has been going on for several months now.
The day before Erdoğan’s announcement, the Turkish lira had reached one of the lowest ever recorded values against the dollar: on Sunday it took 18.36 Turkish lira to buy one dollar. After the speech, the exchange fell to about 11 Turkish Lira, which is the Financial Times he defined “The most volatile day for the Turkish lira since the 1990s”. In 2019 it took about 6 Turkish Lira to buy one dollar.
So by the time markets (including the US) closed, the Turkish lira had seen a huge gain in value, now standing at 13.49, down from 18 all the way down. Erdogan’s supporters cheer for the victory. I’m not sure how it was done but if this is a win I don’t want to see what a loss is. pic.twitter.com/YdYpDxMPPt
– Louis Fishman Louis Fishman (@Istanbultelaviv) December 21, 2021
In recent months, the devaluation of the Turkish lira was caused by the very high inflation, which is now estimated at around 20 percent, which in turn is generated by the huge currency in circulation in the Turkish banks. The latter was a direct result of decisions made by the Erdoğan government, which has long believed that to stimulate the economy, banks need to keep interest rates low and apply for loans and mortgages very easily.
Erdoğan justified his decisions with the Islamic doctrine, which punishes usury (ie the demand for high interest rates) very severely.
Several economists have argued that these decisions could increase inflation, which is the rise in commodity prices, and put consumers in more trouble.
According to analysts quoted byeconomist, inflation is expected to reach 50 percent in the first few months of 2022. But the devaluation of the Turkish lira also gradually convinced many Turks to withdraw their deposits and investments from Turkish banks in order to exchange them for more stable currencies such as the dollar. which gets the banks in trouble.
– Also read: Is inflation temporary or not?
German wave writes that the hypothesis of several foreign diplomats is that Erdoğan is trying to revive the Turkish economy quickly in order to arrive with a good consensus at the next political elections scheduled for 2023.