17

If you have been into Turkish Lira recently, you would be shocked you see that the Turkish Lira's value has been lost more than two times as compare to its value 2 years ago. Now, there have been several factors contributing to its freefall, but the most important one has been the decrease in interest rate, a decision taken by Erdoğan which suffered fierce backlash from local public but he still stood firm by what he has already decided. People are losing hope in Turkish Lira, but it doesn't appear to concern him at all. People are calling Turkey a to-be failed state like Lebanon, but he has some other plans in mind.

What are the benefits of what Turkey is currently doing in relation to the Lira?

11
  • Welcome to politics SE! Please take the tour and read the help center, and feel free to drop by Politics Chat. Nov 23 '21 at 17:22
  • 2
    Right now, your question appears to be asking for motivations, which is off topic here. Please edit your question so it isn’t asking for motivations. Nov 23 '21 at 17:23
  • 4
    Motivations? I am just asking what can be achieved by a state by decreasing the interest rate, and sacrificing its own currency's value for it? What benefits and pros does it bring, which I am unable to understand. Nov 23 '21 at 17:24
  • 2
    @Nemo economics are on topic here, see the help center Nov 23 '21 at 18:32
  • 5
    Nit: The lira cannot have lost more than two times its value, or its value would now be negative. Presumably OP meant "lost more than half its value".
    – abligh
    Nov 24 '21 at 7:09
20

Lowering interest rates makes it easier to borrow money. This allows businesses to grow using borrowed money, without having to pay high interest rates.

The question assumes that allowing your currency to fall in value is a bad thing. That is not always the case. If your currency goes down relative to the major currencies, then that makes your exports cheaper for overseas customers. Meanwhile imports become more expensive. A falling currency also makes your country a more attractive place for foreign tourists, as their money will buy more.

So, a falling currency increases exports and tourism. It also discourages your citizens from buying foreign goods, causing a further boost to your local industry.

10
  • 5
    I actually agree with everything you said, but how is this far from being a disaster? I mean... it's nice of Erdogan to help foreigners visit the beautiful country of Turkey, but it's honestly a pity that he outprices Turks to enjoy Turkey.
    – Andrei
    Nov 23 '21 at 20:05
  • 2
    @RameezUlHaq Locals might want to do normal things, like going on holiday. Short of restricting tourists to come to Turkey, which is in essence an export, Turks will be outpriced for Turkish holiday destinations, and they are surely outpriced for out of Turkey holiday destinations. Imo, giving up holiday is a tough price to pay.
    – Andrei
    Nov 23 '21 at 20:19
  • 9
    -1: this answer makes it sound like a good thing, when it's actually part of the big financial and economic crisis in Turkey. High inflation almost invariably leads to lower salaries and worse conditions for the workers. Turkey's economy is predictably contracting through this crisis, as opposed to the supposedly good effects mentioned in the answer. Nov 24 '21 at 12:39
  • 7
    @MartinArgerami The original question was "What are the benefits of what Turkey is currently doing in relation to the Lira?". My answer is intended to answer that question, rather than any other.
    – Simon B
    Nov 24 '21 at 13:48
  • 2
    @SimonB you are missing a very important factor that %80-85 of exports are actually dependent on import of raw materials and energy in Turkey. So higher exports are not a benefit at all, in the end supply is limited, but devaluation of currency is not limited.
    – oozkan
    Nov 24 '21 at 15:12
13

First of all, don't be fooled by the usual personalisation. It appears as the result of choices made by Erdogan, but these things never depend on a single person, Erdogan is just acting in this way to attract all the attention.

Then, the explanation is the usual one, it applies to almost any country: this is what employers are asking to the government. Cutting the value of the currency is the easiest way to cut all the salaries. Often employment contracts contain some mechanisms to recover the value lost when the inflation induced by the devaluation start to affect the workers, but never the entire loss is recovered.

5

What are the benefits of what Turkey is currently doing in relation to the Lira?

None, the events of the past 2-3 years are the consequence of Erdogan destroying the independence of the Turkish Central Bank. While artificially debasing a currency may help the economy in certain circumstances, a currency whose value halves in 12 months (against USD and EUR) only brings chaos and double digit inflation. It can only be the result of bad monetary and/or fiscal policy.

It's much harder to plan an investment if we don't know what 1£ will be worth 12 months from now. If I decided to buy 100 tons of {whatever} a year for 5 years at a fixed price from a local supplier, the supplier may not be able to fulfill the order, because the price we negotiated may not cover their cost anymore. Or should we negotiate our contracts in a foreign currency? Or if I signed a contract with a foreign supplier I may not be able to pay them. This may reduce our planning horizon significantly.

Eventually people will have to renegotiate their salaries or lose much of their purchasing power to the double digit inflation. These negotiations will span over the year(s) and some people may profit while others may lose, social unrest may ensue. If all those operating in the tradable sector manage to maintain their purchasing power, the cost of exports expressed in foreign currencies may not even change (in the local currency will increase significantly), eliminating the only benefit of currency devaluation: cheaper exports.

4

For people who are seeking for more complete answer:

Debasing currency value increases export and tourism, as already mentioned in other posts. But it is missing a very important fact that %80-85 of Turkish exports are actually consists of imported materials such as imported raw material, transportation costs like oil, cars, trucks etc. Turkish source

A very basic example: I don't have latest figures but in 2006, Turkey imported tomato seeds from Israel, which is equivalent of %22 of total seeds, and as far I know %70-80 range of seeds were imports. So in order to grow tomato you import seeds, in order to transport tomatoes to other countries you use imported oil/gas and imported trucks etc.

In the end almost all economists in Turkey agrees that debasing currency makes a very limited effect on exports, couldn't even be considered as a benefit since you are also increasing gas/oil prices which is used to produce electricity, heating etc.

7
  • 3
    As it’s currently written, your answer is unclear. Please edit to add additional details that will help others understand how this addresses the question asked. You can find more information on how to write good answers in the help center.
    – Community Bot
    Nov 24 '21 at 17:19
  • This sentence is very unclear to me : "%80-85 of Turkish exports are actually consists of imported materials" : Do you mean the level of Turkish imports is 80-85% of the level of their exports ? In that case a weak Lira would theroetically still be advantageous for the Turkish production system as a whole... Also, sources would improve this answer.
    – Evargalo
    Nov 25 '21 at 10:00
  • 1
    @Evargalo - I took that sentence to mean that 80 to 85 per cent of all Turkish exports consist of goods or materials that were previously imported. As a made up example, say Turkey's main export was widgets and each widget was made almost entirely of localunobtanium, which had to be imported from another country - the widgets would be a hugely significant export but making them would be entirely dependent on importing the raw material. In that case, a devalued Lira would make Turkish widgets hugely attractive overseas but Turkey would be unable to afford the import prices of localunobtanium...
    – Spratty
    Nov 25 '21 at 12:18
  • ...and therefore unable to make any widgets to meet the demand.
    – Spratty
    Nov 25 '21 at 12:18
  • 1
    What I meant was, basically every 100 dollar worth of products exported, consist a cost at least 80 dollar of imported material. So when you debase currency, you gain competitive advantage for exports, but you also have to pay more while you are importing raw materials for your production. Biggest cost of Turkish industry is not salaries, it is energy and raw materials. Industries already use black market workers, refugees to reduce salary cost. Additionally competitive advantage gain is limited as local experts say, but I couldn't find any tangible source to prove it so I won't go ahead.
    – oozkan
    Nov 25 '21 at 21:38

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .