Recent changes in interest rates in the United States and other developed economies are likely to have consequences for emerging markets, and it appears that Turkey is the first to enter the dock. The lira plunged around 14% against the dollar on Monday in an incipient crisis that is mainly, but not entirely, the fault of President Recep Tayyip Erdogan.
This week’s break of the lyre was caused by the resignation on Saturday of the central bank president by Erdogan. The main sin of the deposed monetary conductor, Naci Agbal, was to fight an aggressive battle against inflation. He had raised the basic interest rate from 10.25% to 19% in an attempt to stabilize consumer prices, which rose 15.6% year on year in February. Erdogan prefers accelerated economic growth as much as possible, regardless of inflationary consequences, and he seems to believe that higher interest rates cause higher prices.
Erdogan’s economic mismanagement is nothing new. Turkey under his supervision has suffered repeated crises of various types, most recently with another spike in inflation that became a currency crash in 2018. But two differences are notable this time around.
One is that investors have become convinced that Erdogan has finally seen the light of economic policy and now claims to be surprised that he did not notice. The appointment of Mr. Agbal in November, along with the resignation of Mr. Erdogan’s son-in-law, who had been Finance Minister, was announced as a sign that competent people would be responsible for macroeconomic policy. Still, Erdogan is Turkey’s biggest economic problem and guess what, folks: there are still games of chance at Rick’s.
The other new factor is the global economic environment, which is much less hospitable than during the last Turkish crisis, two years ago. The pandemic is affecting economies everywhere, and Turkey has been hit particularly hard by the collapse of travel due to its dependence on tourism. With the summer holiday season in doubt, especially for Turkey’s many European visitors, it is unclear how the country can start making money out of the financial hole.