Turkey’s next currency crisis approaches

The Turkish lira is “back in the firing line”, says William Jackson of Capital Economics. The Turkish tourism industry has been hit hard by the pandemic, reducing crucial foreign-currency earnings. 

Rising tensions with EU member states have led to talk of economic sanctions. The result is that the lira is down by 14% against the dollar this year and has been trading above the ₺8/€1 level for the first time in two years. 

Turkey’s central bank is thought to have spent more than $60bn propping up the lira this year but it is fast running out of options, say Caitlin Ostroff and Anna Isaac in The Wall Street Journal. Exchange reserves are dwindling and the only remaining option – an interest rate hike – is practically ruled out because of pressure from President Recep Tayyip Erdogan to keep credit easy. 

That means that devaluation looks likely, but if the authorities lose control of that process then inflation – already at 11.76% – could spike higher. Foreign investors have pulled $4.3bn out of Turkish shares this year, which is only exacerbating the currency’s problems. 

It is only two years since Turkey’s last currency crisis. On that occasion the lira lost more than 25% of its value against the dollar and inflation peaked at 25%, forcing the central bank to hike interest rates to an eye-watering 24%. A series of currency crises have seen the lira lose 83% of its value against the US dollar since August 2008.