Why is the Turkish lira’s value still falling?

Turkish President Recep Tayyip Erdogan’s historic run-off re-election raised hopes for economic stability and appreciation of the Turkish lira against the US dollar.

However, after the May 28 vote, the lira’s value continued a slow decline, reaching a value of 23.3 to the dollar on June 7.

Here’s what’s going on:

How did the lira get to this point?

Beginning in 2013, the lira to dollar exchange rate began a slow decline, which economist Emre Alkin says was the starting point of the lira’s devaluation.

Since 2013, Turkey has been embroiled in “political storms”, says Murat Okcu, a professor of economics and administrative sciences at Suleyman Demirel University.

“In addition to the Gezi events [in 2013] and major political storms, such as [the] July 15 [coup attempt], the economic crises that emerged with the 2018-dollar rate attacks and the pandemic are the political and economic storms which marked Turkey’s last 10 years,” Okcu said. “These events unearthed the cracks in society and caused great shocks.”

Alkin, the rector of Istanbul Topkapi University, says diplomatic mistakes or internal politics were automatically reflected in the stock market and interest rate reactions.

In what was called a “historical peak”, the lira’s devaluation accelerated in 2021 when it went beyond single-digit figures and reached a value of 10 in the lira-dollar rate.

Experts Al Jazeera spoke to say the lira’s continuing devaluation was a predictable result of suppressed inflation prior to the elections, which resulted from the central bank stabilising exchange rates by selling foreign exchange reserves in return for the lire.

“[After the elections], we can see that [the central bank] is not [interfering] in the market as much,” Alkin said, leading to the lira’s continued devaluation.

What’s going to happen next?

Government and industry experts made their 2023 budgetary calculations based on expectations that the lira would continue to fall, according to Alkin.

“The industry is prepared for a 25 lira to dollar exchange rate. In fact, even a dollar exchange rate between 25 and 28 lire will not be seen as an anomaly,” he said.

The lira will never regain its pre-2014 value. “No one should expect this, [because] there is an established market now. What will happen is that at some point, the increases in prices and the [lira’s] extreme worthlessness will stop,” he said.

Experts say this can only be done by increasing interest rates.

Now, Alkin added, the lira would begin to “reach its true value” after a period of delayed inflation.

What has Erdogan done so far about this?

Beginning in late 2021, Erdogan and his government adopted an “unorthodox” policy of lowering interest rates to promote economic growth and increase production. This policy is in direct contrast to the orthodox approaches of either increasing interest rates or increasing production.

Okcu says Erdogan’s policies were an attempt to establish an alternative economic system to capitalism. “It is important to remember that Erdogan and AK Party came from a line [of politics] which sought to [establish] a just order as an alternative to the capitalist economic system,” he told Al Jazeera.

This system, in line with the country’s “Century of Turkiye” vision, was an attempt to create an independent economy, freeing Turkey from global tutelage.

But this policy, compounded with post-COVID effects, resulted in increasing inflation, which reached a new 24-year high of 85.5 percent last October.

In the face of rising inflation, the government adopted an interventionist policy and stabilised interest and foreign currency exchange rates.

However, while policy interest rates were lowered to 8.5 percent, the government’s attempts at economic growth were thwarted by bank loans with rates as high as 60 percent, making it difficult for existing and new businesses to take out loans.

Instead, the country’s consumption rates increased, with people stockpiling foreign currency or turning to other means to protect their deposits, Alkin said.

Is Erdogan going to change his approach?

Erdogan has appointed Mehmet Simsek, a market-friendly figure who has served in the government before, as treasury and finance minister in his new government.

Alkin says Simsek taking the helm of the economy again signals the end of the government’s interventionist policy.

But so far, the appointment of Simsek and Hafize Gaye Erkan – the first woman to head the central bank and financier with a stellar record in the United States – has not been enough to provide confidence to the international market in spite of their more “orthodox” and “rational” approaches.

Alkin says the next step should be to increase Turks’ purchasing power, at least enough to eliminate the high inflation and cost of living caused by high exchange rates, which he predicts will take at least 18 months.

This, he says, can be done only by increasing interest rates and ensuring stability through “rational” economic decisions.

It is still unknown what kind of policy the government will adopt moving forward. Following the appointments of Simsek and Erkan, there are expectations that the next interest rate announcement on June 22 will raise the rates.