Much to the chagrin of President Recep Tayyip Erdogan’s economic problems were the dominant issue ahead of presidential and parliamentary elections in Turkey on June 24 at the background of the fall of the Turkish Lira and rising interest rates.
To stop the decline of the Lira, the Central Bank raised interest rates twice since may, when the price of the dollar rose to a historical high of more than 4.9 liras. Despite the twofold increase in rates, the dollar fell by only 4.5% and remains above the 4.7 lyre that holds the Central Bank in tension and constrains for further action.
It is unclear how effective were attempts to maintain the exchange rate of the Turkish Lira, but Erdogan continues to call people who keep savings in hard currency “under the pillow”, to return to the Lira. Amid a sharp currency depreciation of about 20% since the beginning of the year, many Turks turned to the dollar to maintain the value of their savings.
During a campaign rally on may 26 in Erzurum, Erdogan appealed to citizens who have dollars and euros, with the call to move their money into local currency. As usual, he referred to the antics from the outside, aimed at undermining the Turkish economy and added, “together We will stop this game….We will not leave the free market, and very soon we will deflate currency “bubble”.
Inflation in Turkey
It was not the first appeal of Erdogan with a request to exchange dollars for Lira. In December 2016, when the dollar rose to 3.5 liras, after three months ago it was 2.8 Lira, the President again spoke of the financial above, and urged citizens who have savings in foreign currency, convert them to Lira or gold.
In another appeal a month later he said, “there is nothing to Fear. I urge everyone not to collect foreign currency “under the pillow”, and to translate it in Turkish liras. If the money will be transferred to the Lira markets, I think, breathe freely”.
The Turks always had hard currency for a “rainy day”, but there are significant signs that the problem has now escalated. Despite a surge of hard currency, which is clearly reflected in the rapidly growing foreign exchange prices, a corresponding increase in foreign currency deposits in banks is not observed, which raises the question of what happened to the money.
According to the weekly banking statistics of the Central Bank’s foreign currency deposits of local residents at the end of 2017 amounted to about $154 billion, Despite a surge of hard currency in April, the deposits not only increased, but made about $1 billion as of 1 June. What to do with this trend?
“The first explanation that comes to mind is that those who are fleeing from the Turkish Lira for foreign currency, to evade Deposit their hard currency in banks, preferring to store it in their own safes in your home or business. It also explains the repeated calls on Erdogan to return the money set aside for a “rainy day” in the financial system,” writes a Turkish economist Mustafa Sonmez in his article on Al Monitor.
However, the calls of the President, it seems, have not yielded great results. If the Turks listened to his appeals, that would lead to the fall of the exchange prices or at least increase foreign exchange deposits in banks. But small and large savers continue to keep their money outside the financial system, reflecting the declining confidence in the economic prospects of the country and managing the economy of Ankara.
The crisis of confidence is also reflected in the official indices of trust. Based on monthly surveys conducted by the Turkish statistical Institute and Central Bank, since January, the confidence indicators are falling. The coincident economic index, which combines consumer sentiment and real sector was 93.5 in may, down from 105 in January. The consumer confidence index over the same period dropped 2 points to 70.
The crisis of confidence among the local population exacerbated by rumors spread via social media that the government may resort to drastic measures to curb the revolution in hard currency, including restrictions on foreign currency deposits in banks and capital movements. Countries affected by the crisis, from time to time such measures, and in Turkish opposition circles, in particular, believe that the Erdogan government is quite capable of such limitations. As a result, the conversations that people bring their hard currency from banks, spread like wildfire.
Report 2017 “On wasted resources in Turkey,” commissioned by the Ministry of customs and trade, includes insights about the savings, which the Turks kept for a “rainy day”. According to the report based on interviews 1650 people in 26 provinces across the country, the Turks keep 20% of their savings in Lira and hard currency at home. About 36% of savers say that they keep their money in Bank deposits, while another 35% say they put their savings in gold. According to the survey, about 60% savings in hard currency and 77% of savings in gold stored at home.
The report recommended that “to inform people about how to use their savings in the financial system”: “to get the savings hidden in the “black day” in the financial system, people must be offered attractive advantages such as the possibility of interest rates, and these benefits should be encouraged, emphasizing the risks of storing savings “under the pillow”.
A certain amount of hard currency, meanwhile, is abroad, including in tax havens, either legal or illegal ways. Legal translations include the creation of companies, other forms of investment and purchase real estate abroad. Such movement of capital also contributed to the loss of hard currency, while the increase in financial requirements raised the price of foreign currency, stimulate inflation, and interest rates for the funds necessary to bridge the gap.
Simply put, the crisis of confidence is the biggest problem for the Turkish economy. The prevailing political culture, based on the polarization of the society, played an important role in the onset and aggravation of this crisis. Thus, new unifying political climate can help to restore confidence and encourage the return of funds to the financial system, which will also have a positive impact on the economy.
