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21 Nov 2021

Sliding Lira, High Inflation a Threat to the Turkish Economy and Financial System

The Index Today

Turkey’s inflation crisis and sliding lira is posing great risk to the economy and the financial system according to economists.

A society which once held immense pride and considered itself a strong rival to its European neighbors is now weakening dramatically. The lira has lost over a third of its value against the dollar in the past eight months. Many Turkish citizens are on the brink of poverty as inflation continues to reduce disposable income and savings.

Turkey’s President Erdogan’s economic strategy of interest rate cuts has fuelled inflation. However, arguments put forward for the strategy focus on upcoming economic growth. The Central Bank brought down interest rates for the quarter despite inflation levels reaching 20%. The nation is seeing one of the worst economic crisis in a 3 years. Many leading banks and businesses in the nation are at risk of long term instability with foreign currency loans if interest rates continue to be cut. The more the lira drops in terms of value, the more difficult it becomes for businesses to pay off debt and loans.

Fitch Ratings revealed that the non-financial companies in Turkey held around $160 billion in foreign exchange assets as of August. According to the latest report by Fitch, “risks remain high given exposure to the volatile Turkish operating environment, risky segments and sectors significant foreign-currency lending and the high lira interest rate environment.” On the other hand, short term debt of banks was recorded at $84 billion which is expected to be paid by April next year.

Many local citizens are changing their local earnings into foreign currency and seeking ways to migrate to other countries. New rules implemented force Turks to show identification proof when exchanging currency over $100. The President has intensified instructions to bring down rates further amid political opposition and weakening economy.

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