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Turkey’s Currency Crisis

iasparliament
August 23, 2018
3 months
1677
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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.
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