Explained: Turkish lira tumbles; what’s going wrong for the currency

The current decline in lira is not far away from the record low of November 6, 2020, a day before Agbal was appointed. It was trading at 7.96 to the US dollar after weakening to 8.47.

The decision to fire Agbal raises concerns that the country will again ease interest rates prematurely. In August 2018, when the lira lost about a quarter of its value, investors had criticised those in power for being too quick to undo tightening and slow to respond to risks.

Under Agbal, interest rates were increased by 875 basis points since November, including last Thursday’s 200 basis points, making the lira the best carry-trade currency this year. It also brought foreign capital back into Turkish markets.

Like the global economy, Turkey too suffered the ravages of the COVID-19 pandemic. Its currency lost 30 percent of its value last year. By January 2020, the currency exchange rate was nearly six lira per dollar.

As the pandemic hit Turkey, lira began going south because Erdogan refused to stop cutting interest rates until May. Also, tourist numbers in summer decreased by 81 percent, causing a loss of more than $11 billion.

Middle East Eye added that by the beginning of November, the lira weakened further to 8.58 against the dollar over worries that a Joe Biden presidency in the US would likely bring sanctions against Turkey because of its purchase of Russian missile systems.

Some economists calculated the actual unemployment rate at 25 percent, while net central bank foreign reserves were estimated at minus $50 billion.

It was then that the then central bank governor Murat Uysal was sacked. Erdogan even removed his son-in-law, Berat Albayrak, as finance minister, who had been reportedly prompted to tender his resignation.

Analysts said there were two major reasons for the depreciation of lira - erosion of the central bank's autonomy, and loss of trust in political leadership. It goes without saying Erdogan has to do with both of them.

The story of a depreciating lira goes back to 2012 when then central bank Governor Erdem Basci started to utilise an “interest rate corridor” or multiple interest rates.

According to Middle East Eye, it was a kind of backdoor method to satisfy Erdogan’s opposition to interest rate hikes, while doing what the market asked for.

(https://www.middleeasteye.net/big-story/turkey-lira-economy-epic-downfall)

Many believe Erdogan’s opposition to higher interest rates comes from his religious beliefs, while say that the businessman in him thinks that lower interest rates would lead to more growth and employment.

Turkey had been carrying a huge current account deficit over the years. The annual deficit was expected to be over $55 billion, which was supposed to be financed by the cash flows brought by investors, according to Middle East Eye.

Turkish banks and the private sector also had a $200bn debt. But, the final blow came during Erdogan’s London trip in May 2018 when, while speaking to a room full of the heads of the world's largest investment funds, he signalled that he didn't believe in an independent central bank. The lira that day broke another record, reaching 4.39 to the dollar.

The next crisis occurred when Erdogan fired the Cetinkaya in July 2019 for his resistance to cutting rates. Following this, the devaluation of the lira increased.

A fresh Turkish offensive in northeast Syria, drawing international condemnation and brief American sanctions, added to the woes.