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The Turkish lira lost about 44 percent of its value against the dollar last year but recently has stabilized after the government unveiled a new savings scheme and the central bank flooded the economy with cash.
Under the savings program, the government guarantees to make up any loss to savings accounts’ value due to inflation for a period of up to a year.
Given Turkish president Recep Erdogan’s vow to keep interest rates low in the face of inflation, now raging as high as 40 percent or more, there is more inflation danger ahead.
Also, rising U.S. interest rates likely will lure capital out of emerging economies, including Turkey’s, which could push inflation even higher and drive Turks to buy dollars again, researcher Guldem Atabay at Istanbul Analytics, warned in a comment to the Financial Times.
We maintain that Turkey’s central bank is still using the country’s foreign currency reserves to buy lira and prop up its value.
A regulation introduced this year requires exporters to sell 25 percent of their foreign currency revenue to the central bank in exchange for lira. Some analysts believe the bank is pouring those proceeds into the bottomless pit that the lira has become.
“The stability in the lira is coming both from the partial, short-term success of the savings mechanism and from the fact that the central bank is probably continuing to support the lira,” Ibrahim Aksoy, an HSBC analyst, told the FT.
Erdogan already has declared the savings scheme to be a brilliant success.
The government’s “lira-ization plan” will combine with rising exports, increased investment, and job growth to knock down inflation, Şahap Kavcıoğlu, Erdogan’s hand-picked central bank governor, recently said.
Analysts dismissed his claims; the official inflation rate reached 36.1 percent in December, the highest in 19 years, and interest rates are deeply negative when inflation is factored in.
After the government’s statistics agency announced the 36.1 rate, Erdogan fired the agency’s chairman, Sait Dincer, saying in private that the agency overstated the number, according to the FT.
“Never mind who is the chairman,” Dincer said in a comment the FT quoted. “Can you imagine that hundreds of my colleagues could stomach or remain quiet about publishing an inflation rate very different from what they had established?”
“I have a responsibility to 84 million people,” he said.
The firing “will just increase concern about the reliability of the data, in addition to major concerns about economic policy settings,” analyst Timothy Ash of BlueBay Asset Management wrote in a note to clients.
“The authoritarian alliance” headed by Erdogan “keeps harming the country,” opposition leader and former Erdogan ally Ali Babacan said in a public statement after Dincer was dumped.
TREND FORECAST: Erdogan reflexively fires officials who try to force his ideas about Turkey’s economy to confront reality.
Over the past year, Erdogan has dumped three central bank chiefs when they raised interest rates, contradicting his erroneous insistence that low interest rates will cure the country’s inflation.
Our coverage has included “Turkey’s Financial Markets Crash After Agbal Firing” (30 Mar 2021), “Turkey: Another Day, Another Central Bankster Fired” (1 Jun 2021) and “Turkey: The Famous Lira Dive” (23 Nov 2021).
Before long, the country will run through the rest of its foreign currency reserves, pushing the lira lower.
Also, when the central bank has to make good on its promise to repay losses to savings accounts, it will do so with more lira, which will be of little practical value to savers.
As those events come closer, Erdogan’s popularity will erode further as the country’s 2023 presidential election looms. And, he has shown no interest in surrendering power, allegedly having rigged the 2018 election.
As a result, he is likely to tighten his authoritarian control, increase brutality in suppressing protests, and find an excuse to attempt to unite the country against a real or imagined external enemy.
As Gerald Celente often says, most recently on the cover of our 25 January issue, “When all else fails, they take you to war.”