By Smartencyclopedia Newsroom*

Turkey’s President Recep Tayyip Erdogan’s re-election, despite a struggling economy and cost-of-living crisis, has had a significant impact on Turkey’s currency, exacerbated by his unconventional economic policies. In an effort to address these concerns, Erdogan has appointed a well-respected former banker as the finance and treasury minister and named a former co-CEO of a U.S.-based bank as the head of the central bank.

However, uncertainty surrounding Erdogan’s economic direction, coupled with the apparent relaxation of government controls on foreign currency exchanges, has led to a sharp decline in the value of the Turkish lira against the U.S. dollar. The lira has weakened by approximately 20% since the beginning of the year, raising fears of further price increases for basic necessities and compounding the financial struggles of the population already grappling with high inflation.

Erdogan’s economic policies, particularly his belief that lowering interest rates will combat inflation, have been widely criticized. This stands in contrast to conventional economic thinking, which suggests raising rates to control inflation. The central bank has succumbed to pressure from Erdogan, cutting its key policy rate from 19% to 8.5% despite soaring inflation rates. Additionally, the government’s intervention in the markets to stabilize the lira prior to the elections has depleted foreign currency reserves.

The appointment of Mehmet Simsek, a former banker, as a return to the Cabinet and the selection of Hafize Gaye Erkan, a former U.S.-based bank executive, as the first woman governor of the central bank indicate a potential shift towards more conventional economic policies. However, doubts remain about the extent of Erdogan’s commitment to allowing these appointees full independence in decision-making.

The recent depreciation of the Turkish lira is attributed to the government’s relaxation of controls on the currency, combined with market uncertainties. The sharp decline earlier in the week resulted from these factors, leading to concerns about further depreciation. State banks were asked to intervene and sell foreign currency to stabilize the lira, but its value continued to fall to record lows against the dollar.

The impact on the population has been severe, with high inflation affecting households and businesses. The weaker currency has resulted in increased costs for imported goods and raw materials, adding to the financial burden. People, such as Sureyya Usta, are struggling to afford basic living expenses and face uncertainty as the currency’s decline threatens further price increases. With rising rents and limited options, individuals are being forced to make significant cutbacks in their daily lives.

While the immediate effects of the currency shock may be contained, if the depreciation continues unchecked, it could have a more severe impact on market behavior and pricing.

Source: With Agencies