How the pandemic and dollarisation have deepened Turkey’s economic crisis
- The abundant global dollar liquidity created by low US interest rates implied easy access to foreign exchange for emerging-market banks, including lower borrowing costs. However, this hasn’t necessarily benefited Turkey
No one should be surprised by Turkey’s recent economic and financial woes. The country’s triple crisis (currency, banking and sovereign debt) has been unfolding for years. Whether this economic turmoil will incite political turmoil is now a widely debated question.
Aggressive policy accommodation during the pandemic, an unsustainable policy mix that relied on excessive credit growth, and the sale of the central bank’s foreign exchange reserves to offset the impact of capital outflows generated further vulnerabilities. This led to a further 40 per cent loss in the lira’s value since last January.
In November, President Recep Tayyip Erdogan appointed a new finance minister and central bank governor. Subsequently, the country’s monetary policy framework underwent a long-overdue normalisation and the lira regained 10 per cent of its lost value by the end of the year.
Turkey has maintained a floating exchange rate since 2001. It adopted an inflation-targeting regime, under which policy rates should not be adjusted to engineer currency appreciation or depreciation.
