Turkish lira exchange rate: an uncertain future in light of the economic reality

The economic storm in Turkey has not subsided yet.

The exchange rate of the Turkish lira against foreign currencies once again depreciated despite the relative improvement in recent weeks.

The official announcement of an inflation rate of 36 percent in Turkey (unprecedented in the past 19 years) raised concerns about the future of the Turkish economy.

But what does the future hold for the Turkish economy?

At the time of writing, one US dollar equals 13.5 Turkish liras, and there is a huge conflict of opinion among economic analysts regarding the future exchange rate of the Turkish lira.

But how long will this process last, and what will be the consequences for foreigners who either own the lira, own real estate in Turkey, or have business relations with Turkey?

Where did the story begin?

For many, the question may be: Why is the Turkish lira in this situation?

The story is relatively simple from an economic point of view, and of course there are political reasons involved. In short, the Turkish economy has witnessed steady growth over the past two decades with the massive influx of foreign exchange, and in fact, the country’s economic growth has depended on the infusion of foreign currency.

Most of this currency comes from the export of textile products and the export of auto parts, and of course, the Turkish tourism industry is one of the main sources of foreign exchange entering the country.

With the Coronavirus epidemic, the Turkish tourism industry almost collapsed, and the other two sectors (textiles and automobiles) are importing raw materials that naturally require foreign currencies.

In simple terms, Turkey needs to import raw materials with foreign currency to produce.

On the other hand, the volume of Turkey’s imports is very high (from oil and gas imports to luxury goods).

Meanwhile, the lowering of the “interest rate” by the Turkish government was the main reason for the current situation.

The Turkish government believes that Turkish exports can be increased by lowering interest rates.

Low interest rates actually reduce the cost of financing, and when the cost of financing decreases, so does the value of the national currency.

On the other hand, the willingness of depositors to keep money in the bank also decreases. The result of all this will eventually be a further depreciation of the lira and an increase in inflation.

Certainly, the political side of the problem cannot be ignored.

Turkey has been close to Russia for several years, while the United States and Europe expect Turkey, as a NATO member, to keep its distance from Russia.

Turkey’s expansion in the Mediterranean, in relation to Greece and Cyprus, has also led to sanctions on the Turkish economy, which in turn has restricted Turkey’s access to foreign exchange.

Has Erdogan’s counterattack succeeded?

Just a few weeks ago, Turkish President Recep Tayyip Erdogan unveiled a plan that would allow Turkish citizens to secure government support in maintaining the value of their banking assets by converting their dollar holdings in banks into assets based on Turkish lira.

Accordingly, if depositors are willing to keep their lira deposits in banks, the Turkish government will ensure that compensation is paid to the depositor in the event the lira depreciates against the dollar.

And certainly, the move boosted the value of the Turkish lira, which fell sharply against foreign currencies (to a record low of about 18.4 Turkish liras per dollar). But this was not the end of the devaluation of the Turkish lira.

Critics said the Turkish government’s new plan contradicts its previous plan.

In the first plan, the government lowered interest rates, but now, with the promise of reparations, it has actually raised interest rates and made new commitments to itself that it is unclear whether it will be able to meet.

Buying or selling Turkish Lira?

Due to the volatility of the market, both Turkish lira and Dollar traders have lost a lot of money so far. 

The truth is that the long-term outlook for the Turkish economy has great conflict of opinion.

In addition to the uncertainty in the current situation and Russian political turmoil that may extend to the political arena in Turkey next year.

The optimism of foreigners in Turkey about the Turkish economy is relying on the past two decades.

Before that, Turkey’s economy was very weak with high inflation rates, and the country’s political stability was constantly exposed due to several military coups in the past decades.

Part of the optimism about the Turkish economy is due to the possibility of Turkey joining the European Union, which could change a lot in the future.