Türkeye’has been struggling for months to boost its economy by pumping billions of dollars in support of its currency after the crisis worsened last year.
However, it seems that these measures fell short, as the lira fell to its lowest levels against the dollar for the first time since the crisis last year, losing 65 percent of its value from last September.
With inflation rising to record levels, and the Central Bank’s reluctance to raise interest rates, raising fears of another currency crisis, the rise of the dollar, as well as the Ukrainian-Russian war and its consequences at all levels all come into play to make things worse.
Eroding purchasing power
The lira’s historic slide has further eroded consumers’ purchasing power, and the rising cost of food, medical care, energy, and other essentials has pushed millions of citizens closer to poverty levels.
Consumer prices rose by 2.98 percent in May, according to the Turkish Statistical Institute (TUIK). But “Reuters” estimates indicate the number is closer to 4.8 percent.
As for inflation, according to the Turkish Statistical Agency, it rose in May to nearly 75 percent.
This rate is considered the highest among the G-20 countries and the sixth in the world, behind Syria and Venezuela.
On the other hand, some economists expected the inflation rate to be much higher, or around 160 percent.
Oil price hike
Since Turkeye’ imports almost all of its energy needs, it is natural that it will also be impacted by the rise in global oil prices.
According to the Turkish Statistical Institute, transportation costs, which cover the price of gas and diesel as well, increased in May 2022 by 224 percent than in the same month of 2021.
The Turkish Central Bank tried to intervene in the currency markets to support the lira and stem the currency’s collapse by injecting what remaining dollars it has.
According to data reviewed by The Wall Street Journal, the central bank likely sold $24 billion in foreign currency from January to March of this year.
This has resulted in Türkeye’s near depletion of foreign currency reserves, with economists estimating that the central bank has $60 billion more in foreign currency liabilities than assets, which means it has negative net reserves. This is while the foreign trade deficit increased by 157 percent on an annual basis, last May, to reach $10.7 billion.
These negative figures prompted the government to borrow dollars from Turkish commercial banks, raising concerns about a shortage of dollars in the banking system.
The government also raised the minimum wage, but this increase failed to keep pace with the rapidly rising inflation.
The unprecedented crisis in Türkeye’ was accompanied by fixing the interest rate at 14 percent on repurchase agreements, known as “repo”, at the expense of inflation, which rose to the highest level in two decades.
The Monetary Policy Committee statement said that the geopolitical risks that turned into conflict, and the effects of the Covid-19 pandemic, added downside risks to global economic activity and caused increased uncertainties.
It added that the recent rise in inflation was affected by the increase in global energy and food prices resulting from security conflicts, in addition to supply disruptions and increased demand.
For its part, the Central Bank indicated that the goal of not raising the interest rate is to reduce inflation in the country.
It stressed that he will firmly continue to use all the tools available to it until strong indicators show a permanent decline, and the target of 5 percent is achieved in the medium term, in line with the main goal of price stability.
The aforementioned negative numbers and the measures that did not bring good results weighed heavily on the international ratings of the country and the banking sector alike.
In April, Fitch Ratings downgraded Türkeye’s debt from BB- to B+, with a negative outlook, citing a lack of confidence in decision-makers’ ability to reverse course.
As for Standard & Poor’s, the credit rating agency said that banks in Türkeye’ are most exposed to the risks of global liquidity shortages heading to emerging markets, in light of the rise in interest rates in global markets.
The results showed that the country’s banks were directly exposed to the risks of rising interest rates as a result of their large foreign debt.
Are there opportunities left for Türkeye’ to escape the eye of the financial and economic storm?