The lira has shed half its value since the start of the year — and 30 percent in the last month alone — as policymakers bow to President Recep Tayyip Erdoğan’s wishes to bring down borrowing costs despite soaring inflation.
A dollar could buy three lira in 2016 and 7.43 lira on Jan. 1. It was worth 14.70 lira on Wednesday while the annual rate of consumer price increases stood at more than 20 percent.
Erdoğan has launched a self-declared “economic war of independence” that defies conventional market economics by fighting inflation through a reduction of borrowing costs.
Central banks around the world are instead either raising or preparing to raise rates to combat consumer price jumps caused by factors related to the coronavirus pandemic.
Analysts and diplomats believe Erdoğan unleashed his pro-growth policy in a bid to revive sagging approval numbers ahead of a general election due within the next 18 months.
One senior Western official said Erdoğan feels “unchained” after stacking the central bank with allies and ousting ministers who refused to subscribe to his unorthodox views.
Erdoğan’s public support levels have languished near the low end of his 19-year rule for much of the past year.
Most polls show him losing in a runoff against potential presidential rivals — a defeat that could leave his Islamic-rooted party in disarray.
Erdoğan has cited China as an example as he pushes for economic growth at all costs.
China brought down the value of its currency to boost exports and achieve spectacular rates of economic expansion over most of the past two decades.
This created a new middle class that helped China achieve more sustainable consumer-driven growth.
Turkey’s economy also expanded at an annual rate of 7.4 percent between July and September.
But most analysts believe Erdoğan’s attempts to boost jobs and propel economic expansion through cheap exports are likely to end in social turmoil.
Turkey imports most of its raw materials and spends foreign currency to buy foreign oil and natural gas.
The lira’s steady depreciation makes these purchases more expensive.
Economists estimate that Turkey’s net hard currency reserves are running dangerously low — and are in negative territory when so-called “currency swap” agreements with allied countries’ banks are taken out.
The central bank has depleted its reserves further by intervening four times in the past month to help cushion the lira against more dramatic single-day falls.
But the losses continue as Turks buy up gold as well as dollars and euros in a bid to preserve their savings.
S&P last week became the latest major global ratings agency to switch Turkey’s credit outlook to negative.
Current policies have “further undermined the exchange rate of the lira and worsened the inflation outlook, heightening the risk of banking system distress.”