Turkey’s lira dropped for the eighth consecutive day in the biggest sell-off since a currency crisis peaked in December as investors fretted over the impact of the war in neighbouring Ukraine on the country’s import-dependent economy.
The lira dropped by 1.6 percent to 14.87 per dollar on Thursday. That was the lowest level since President Recep Tayyip Erdogan announced a deposit scheme linking the lira to the dollar in late December in an attempt to arrest a freefall in the currency.
The war in Ukraine has left Turkey’s economy exposed to surging energy prices. The rising price of commodities plus loose monetary policy – Erdogan has ordered the central bank to slash interest rates – has sent inflation soaring to 54.4 percent. That is the highest level of any major economy or emerging market. Economists say inflation may hit as high as 70 percent in the coming months.
“We have been caught in one of the worst shocks that could happen to us, with a fragile economy. We are not at war, but we are bombarded from five channels: foreign trade, tourism, risk premium, energy, food prices,” Hakan Kara, a former chief economist for Turkey’s central bank, said on Twitter.
Turkey’s natural gas import bill is expected to double to $40 billion this year, pressuring government and central bank finances, Reuters reported on Thursday. That cost compares with the central bank’s $18 billion in net official foreign exchange reserves.
The country’s trade deficit more than doubled to $8.1 billion in February, led by a 45.6 percent annual increase in imports to $28.1 billion. Exports rose by 25.4 percent to $20 billion. The current account deficit is expected to widen to $7.5 billion in January, the biggest gap in four years, according to a Reuters poll published this week. The data is due tomorrow.
Turkey needs to fund any deficit in its current account with foreign currency revenue such as tourism income or investment or risk more losses for the lira. But the war in Ukraine is threatening a slump in visitors from Russia and Ukraine, both of which provided millions of tourists and billions of dollars in revenue last year. Russia is the country’s biggest provider of visitors.
The Turkish authorities are growing more alarmed each day that the fallout from the war in Ukraine may scupper Erdogan’s economic programme, which is focused on attaining current account surpluses and keeping interest rates low, Reuters said citing interviews with four unidentified Turkish officials. The central bank cut rates to 14 percent from 19 percent in the final four months of last year on the president’s orders, sparking the sell-off in the lira.
The lira lost 44 percent of its value against the dollar in 2021.