One of the oldest continuous currency units in the world, the lira has seen its value erode steadily since mid-decade.
In previous years, Turkey’s currency was a favourite play of traders and investors looking for decent returns in a world of quantitative easing (QE) and rock-bottom official interest rates.
Five years of decline
Turkey was seen as a solid bet in the emerging-market world, a member of the Group of 20 leading economies and of the North Atlantic Treaty Organisation (NATO) and a candidate country for European Union membership.
But as Turkey has become entangled in fighting in Syria and criticism has mounted of alleged authoritarian behaviour by the country’s president, Recep Tayyip Erdoğan, appetite for the Turkish currency has waned.
Against the euro, the lira was worth €0.15, down on 12-monthly highs of €0.17 seen on December 2 and again on February 3 but above the yearly low of €0.14 at which it stood on August 27, 2018.
It is, however, the picture over the last five years that is the most striking. On September 5, 2014, the lira traded at $0.46, after which a steady decline set in. It has been the same story against the euro, where the lira changed hands at €0.36 on September 5, 2014.
And while the lira’s decline against the dollar could be partly explained by the series of interest rate rises that began in 2015, no such excuse exists in relation to the euro, given interest rates in the single currency bloc remain negligible.
“Internal and external imbalances”
Political and military effects have played their part in denting the lira. In 2016, a coup attempt against President Erdogan failed, while Turkish forces have been fighting in Syria, backing some of the rebels who are trying to oust President Bashar al-Assad. This has put Turkey in direct confrontation with Russia’s President Vladimir Putin, who is supporting the established government.
Furthermore, the U.S.-China trade war has hit Turkey, traditionally an export-orientated economy, first selling carpets and clothing to the world and, more recently, electronic and petrochemical products.
But the real drag on the lira may be more prosaic, in that, as the International Monetary Fund (IMF) pointed out in April in its latest Article IV health check, the Turkish economy is overheating as a result of the continuation of expansionary policies that “were initially warranted” but “are no longer appropriate.”
The IMF added: “Monetary policy appears too loose and its credibility is low; and on- and off-budget fiscal policies (including credit guarantee schemes and PPP [public private partnership] activities) are expansionary and risk undermining Turkey’s hard-earned fiscal credibility.”
It went on: “As a result, the economy faces internal and external imbalances: a positive output gap, inflation well above target, and a current account deficit of more than 5% percent of GDP [gross domestic product].”