Is there no respite in sight for the Turkish lira?

When I rented my first Istanbul apartment, in mid-2013, the Turkish economy was humming and 2 lira were equal to 1 US dollar. A year later, the lira had roughly the same value and, to me, the recently arrived expatriate, Turkey’s currency seemed relatively stable and unworthy of concern – which is precisely when the bottom began to fall out. By late summer 2015, the lira sat at three per dollar, spurring my landlord to increase my rent by about one third. By early 2017, the lira had fallen to nearly four per dollar and some Turkey watchers wondered if that might be the end of the decline. Instead, the lira crossed the five-versus-the dollar threshold in mid-2018 and hit six a year later. Then the pandemic arrived: inflation and unemployment have been persistently high over the past 20 months as some 1.5 million Turkish citizens have been driven into poverty. Last week, after a midnight decree from President Recep Tayyip Erdogan dismissed three central bank officials , the lira fell to nine versus the dollar and continued to drop. The lira has consistently ranked among the worst-performing currencies in recent years and may be headed for 10 versus the dollar by year’s end. Turkish citizens’ rush to trade their liras for dollars and euros last week spurred the government to mandate the use of identity cards for such transactions, presumably in an effort to slow lira departures. As Turkey has remained mired in economic crisis, I have in this column regularly peeked under the hood: detailing the current Turkish government’s unorthodox view of the relationship between inflation and interest rates; the musical chairs atop the central bank; the government urging citizens to shop on a full stomach; a top imam reminding Istanbul's residents that Allah will reward those who survive fear and hunger; debt piling up for farmers and small businesses, and more. In August, I argued that the central bank governor faced a choice: either cut interest rates or lose his job. He made the cut last month and remains in his post, but inflation has ticked up to a two-and-a-half-year high. From 2003 to 2018, Turkey reduced its poverty rate by 77 per cent. But the rate has since increased nearly 30 per cent. Even as Turkey’s economy registered growth in 2020 and early 2021, the gap between the haves and have-nots widened. Today, many Turks are struggling to pay for essentials that cost three-to-four times more than they did just a handful of years ago. On Friday, Omer Koc, the chairman of Koc Holdings, Turkey’s largest conglomerate, acknowledged the need for reforms. “It is extraordinarily saddening to see how much the rising pressure from inflation is exhausting our citizens,” he said at a company event. There is much to exhaust them these days. As the lira plummeted last week, the price of oil crossed the $80-per-barrel threshold for the first time in three years. Goldman Sachs expects the price to remain high for an extended period, which is particularly problematic for Turkey as it produces very little of its own energy. The government has thus far kept fuel prices relatively stable by eliminating taxes. “But as of this week it seems they’ve run out of tax to forego,” analyst Can Okar said on Twitter, detailing how the government is between the proverbial rock and a hard place. “Now they can either subsidise and make the black hole in public finances explode. Or price hikes.” In light of reduced opportunity in recent years, droves of educated young Turks have moved abroad. More than 330,000 people left Turkey in 2020 and more than 40 per cent were under age 35. A recent survey by Metropoll found that 47 per cent of those polled hope to work or study abroad: university graduates and highly skilled workers, in particular, wish to “start over again”. Due to a pandemic-driven decrease in flights and salary, for instance, Turkish pilots have been leaving the country in droves, with many seeking the sharply higher wages of Gulf-based airlines. Vedat Bilgin, Turkey’s Minister of Labour and Social Security, last week sought to put a positive spin on the wave of departures and growing interest in seeking fortunes elsewhere. “It is natural for young people to have this desire,” he said. “We should not look at them as 'they want to escape from Turkey'. They will get to know the world.” For university students who remain, the falling lira and a sharp rise in real estate prices have made it prohibitively difficult to find housing. As classes resumed this month, thousands camped out in parks to underscore their plight. Mr Erdogan has denounced the protests and said many of those camping out are not even students. “This is just another version of the Gezi Park incidents,” he said. In some ways, it does all go back to mid-2013, when the economy first showed signs of sluggishness and millions of Turks took to the streets to push back against early signs of authoritarianism. The longtime Turkish leader could be forgiven for feeling as if his least favourite movie has been playing on an endless loop for the better part of a decade: the Gezi protests of mid-2013, a massive corruption probe six months later that forced out three of his ministers; his Justice and Development Party losing its parliamentary majority in mid-2015; the coup attempt in 2016, the currency collapse in 2018, big losses in the 2019 local election and finally the pandemic . Along the way, Turkey’s gross domestic product has lost a quarter of its value, falling from a peak of $960 billion in 2013 to $720bn last year. The global financial system has voted with its feet: in 2013, foreign investors held 30 per cent of lira-denominated government debt; today it’s less than 5 per cent. Many observers expect that Mr Erdogan’s latest central bank moves were made in preparation for another rate cut, which could extend the lira’s decline and further imperil Turkish consumers. Years ago, Mr Erdogan set the ambitious goal of making Turkey one of the world’s top 10 economies by the republic’s 100th anniversary in 2023. But IMF data published last week revealed that Turkey has instead fallen out of the world’s top 20 economies. The key question now is just how far the lira, and the Turkish economy, might fall.