Turkey’s Currency Crisis

Why in news?

The value of Turkey's currency, lira, has nosedived since January and has lost more than 34% of its value against the dollar.

What caused this?

• Construction Boom - The Turkish economy has been in slow-motion decline for a while, with the lira sliding steadily downhill since 2016.
• A construction boom was happening and it reached its height in 2013 and 2014, as Turkish banks issued low-interest loans.
• This construction frenzy has been at the heart of Turkey’s economy, accounting for up to 20% of the country’s GDP growth in recent years.
• But this was not accompanied by having enough foreign capital.
• So property developers funded this construction frenzy with cheap loans in foreign currencies. (In a parallel to the 2008 financial crash, the boom was funded by low-interest loans and ballooning debt.)
• Turkey is also heavily reliant on imports for construction materials.
• Much of the properties were built with the expectation that it would be bought by wealthy investors from Gulf countries.
• But the demand from the Gulf failed to rise to the level hoped.
• This lack of demand, alongside rising costs for iron and steel, has caused many projects to stall.
• This was further complexed by poor regulation of this industry.
• These factors affected the exchange rate of lira heavily.
• Foreign Relations - The present crash was triggered by a spat with the US government over Turkey’s ongoing imprisonment of the American pastor Andrew Brunson, who is accused of involvement with a 2016 coup attempt.
• Lira experienced a further blow when Trump Administration said doubled the tariffs on Turkish steel and aluminium.
• Central Bank - In many nations, the central bank is independent of government. This means it can keep control of inflation by raising them when necessary.
• But in Turkey, Mr Erdogan has made sure he controls the reins.

What are the consequences?

•  To repay loans in dollars and euros, as the weakened lira means there is now more to pay back.
• Many middle class homebuyers who paid for new apartments upfront are also affected as these apartments are now on permanent hold because the companies can’t afford to build them.
• Only upside to this is that the tourism industry has been flourishing due to the fall of lira.

How did this affect Rupee?

• This turmoil has impacted many emerging markets due to deteriorating emerging-market sentiment among investors.
• Rupee faced a huge blow as it was already being affected by lack of FII inflows and growing oil prices.
• Hence the rupee plunged to hit a record low of 70.08 a dollar.
• Central bank intervened to slow the pace of fall but it is unlikely that there could significant intervention as factors impacting the currency are coming from external sources.
• Experts feel that the fall is not so dramatic and so not a time to panic.
• Foreign investors investing in government bonds or fixed income may feel some impact due to this.
• But the fall provides a big opportunity for exports especially at a time when trade wars are happening.