It was not only the US sanctions that added to the woes facing the Turkish lira, but definitely these sanctions deepened the confidence in a regional economy which is suffering from a power that regained the muscles of its economic achievements over its monetary sector, thus taking the direct blame for the collapse of the lira.
When US president Donald Trump tweeted about doubling tarrifs on aluminum and steel tariffs coming to the US from Turkey, Turkish president President Tayyip Erdogan was in a state of shock and instead of creating a crisis group of monetary experts, he started to flounder, with the assistance of his son-in-law, in front the most ferocious crisis facing Turkey.
While the lira was deteriorating in value very fast causing havocs, Erdogan was thinking politically running amid the chaos, empowered with control, influence and his family related members whom he entrusted with one of the major fiscal positions in the country, the minister of finance and treasury Berat al-bayrak.
With the first economic quake, the Turkish lira sank, depreciating 20 percent of its value in less than three days, losing more than 40 percent of its value since the beginning of 2018, waiting for the five difficult ways out as listed below:
To run amid the chaos
This is actually happening now, where President Erdogan choose to prolong the range of the lira crisis to the maximum extent possible, challenging all pressures by the United States, to continue to prove sovereignty over the economy’s capabilities and image, with the consequences facing investors, creditors and neighboring emerging markets near Turkey or those entities in trade relations with Ankara.
Turkey’s foreign debts in currencies such as the Chinese yuan and the pound are more than 50 percent of Turkey’s GDP, the biggest challenge given amid the large drop in lira value and foreign investors’ reluctance to sacrifice new investments alongside a growing trade war with the United States.
Make concessions away from the monetary situation
The tension between Ankara and Washington, was not only limited to the detention of the American pastor Andrew Brunson in 2016 and which turned into a broad title to the crisis. While politicians see the imprisoned pastor as a source of strength because of the sensitivity of the charges of spying for the coup, many financial experts and economists see the pastor as a valuable scapegoat that could be sacrificed after the financial crisis raised the value of his impact on the scene.
Interest rate hike
The magic solution in all the world’s economies is raising the interest rates, which will curb demand and lower price inflation. But Erdogan may not be able to say explicitly that all interest rates are an abomination of Satan’s work. His refusal to allow the central bank to raise interest rates and his repeating saying that the high interest rate is harmful For the economy, and in this case, the Turkish president is like someone who prevents the heat-reducing fever whenever the fever intensifies, the results are disastrous.
In an interview with Al Arabiya English, Chief economist of the Kuwait National Bank Group, Saada Chami said that raising the interest rate by a small percentage would not help in easing the major crisis facing the Turkish lira, stressing that the 1.5 percent that was discussed will not solve the crisis.
He added that Turkey probably needs a tough strategy in raising interest rates to succeed in solving the problem.
The Turkish crisis did not come out of the blues, as the structural and financial imbalance goes back to 2015 when Turkey began to suffer from expansionary monetary and fiscal policies that led to the imbalance of external trade and the general budget deficit.
The structural imbalance pushed inflation to more than 15 percent last July, and the problems have accumulated over the last 3 years, awaiting an opportunity to explode and influence the most important financial indicator, which is the lira exchange rate, which is highly sensitive for two reasons: world confidence and foreign trade relations.
For Erdogan to renew this confidence, maybe he has to abandon the intervention in monetary policies related to the public expenditure and instead concentrates on the challenges facing Turkey with the world.
But it seems that Erdogan priorities are far away from this approach with his adherence to keeping his son-in-law at the top financial positions in the country, Which will remain a sign of mistrust to world investors.
From who to ask for help?
When Standard and Poor’s and Moody’s, which assess countries’ finances, downgraded Turkey’s sovereign debt rating to “undesirable”, the two main reasons were “Turkey’s lack of a credible plan for a credible crisis” and “Lack of response to the risks”.
To compensate for the gloomy picture for financial agencies, Turkey should, according to economists, seek help from the International Monetary Fund IMF, an almost impossible move according to Erdogan’s understandings, or request debt restructuring with creditors who have disagreements with Turkey over how to manage its financial affairs.
It may be good for Turkey to reconcile itself with its economic system at the private sector level, which has also suffered from the subordination of exclusivity and interference with fiscal power (spending) and monetary (central bank).