The Turkish lira is at a record low ... Why and who are the losers and the beneficiaries?

Despite the Turkish central bank's efforts to tighten credit, the lira (the national currency) fell to a record low against the dollar, as it came under more pressure after the country entered a second wave of the Corona pandemic.

What increases investor concerns about Turkey's depleted foreign exchange reserves and its costly intervention in the currency market, the looming threat to the European Union with sanctions, with the increase in tensions between Ankara and Greece in the eastern Mediterranean.

The lira recorded 7.6440 against the dollar today, Tuesday, at 06:00 UTC, the lowest level ever after it recorded 7.6365, as investors assess the possibility of raising the interest rate by the Central Bank during its meeting this week to limit the currency's decline.

The losses of the lira against the dollar since the beginning of this year have reached more than 21% among the worst performing currencies in the world, yet it has outperformed its counterparts in emerging markets in the most recent sessions, according to Reuters.

With the Turkish currency declining in 6 of the past seven sessions, investors are still awaiting signs of whether the central bank has stopped a month-long indirect monetary tightening policy.

Earlier, Finance Minister Berat Albayrak stated that the country could benefit from the consequences of the global Coronavirus pandemic through a competitive lira that would be placed at the heart of a new strategy to move towards an economy focused more on exports.

The "Central Bank" adjusted its financing tools to increase borrowing costs, despite keeping its interest rate policy stable at 8.25%.

The Turkish lira recorded today, Tuesday, 7.6440 against the dollar (Reuters)

Interest and inflation

With the lira's exchange rate crossing the 7.6 threshold against the dollar, all eyes are turning to the Central Bank's Monetary Policy Committee meeting on Thursday, September 24th. Will the Central Bank raise interest to 15% (the current inflation rate) or will it keep the interest rates the same?

According to economists, the current possibility is that Turkish economic lawmakers will choose an intermediary policy hidden within the multiple interest rate policy, that is, raising the lending rate in the "Delayed Liquidity Window" (LLW) without raising the interest rate itself.

 Fears

Experts expect that the Turkish currency will find its way to 8 liras against the dollar until the end of this year.

Data and sources indicate that the Central Bank and government banks have sold billions of dollars to maintain the stability of the lira. Traders estimate that these interventions have amounted to about $ 110 billion since they began early last year, including the massive sales of the past two months.

There are fears that this will lead to a decline in the total reserves of the Central Bank to 49 billion dollars from 81 billion so far this year, in addition to a sharp increase in the rate of inflation in the country.

Earlier, the governor of the Central Bank, Murad Oissal, said that it is normal for reserves to fluctuate during times such as pandemics, and he reiterated that inflation will soon decline.

The reasons for the decline

Professor of Economics and Finance at the University of "Artuklu" Metin Ayrol, in an interview with Al Jazeera Net, believes that what is happening in Turkey is due to the policy of the "central" in increasing the supply of local money and pumping it into the market while maintaining a low interest rate, which naturally causes the value of the lira to decrease compared to more currencies. Stable as the dollar and the euro.

Errol explained that government policy tends to reduce the interest rate to stimulate the economy in the short term, which will negatively affect the level of rising inflation, pointing out that the problem lies in the government's insistence on intervening in the policy of the "central" responsible in turn for controlling the interest rate, which is linked to the exchange rate, So a drop is expected, he says.

He points out that Turkey's economy - especially hard currency - depends heavily on the services sector (tourism, aviation, construction, real estate).

Tourism revenues in 2019 reached 34 billion dollars, aviation 13 billion, while the construction and real estate sector constituted 10% of the Turkish economy, and these sectors (in general) have witnessed a slowdown due to the pandemic.

The Turkish expert warns that the debts owed by his country amounted to a total of 434 billion dollars, and there are 174 billion of them due during the year, and this constitutes a great pressure on the lira, as it requires the exit of a large part of the foreign currency abroad in light of its need for it now.

Government policy tends to reduce the interest rate to stimulate the economy in the short term, which will negatively affect the rising inflation (Reuters)

Losers and winners

The Turkish academic returned, expecting an increase in the value of foreign direct investment flows during the coming period, because the decrease in the value of the lira would allow foreigners or holders of foreign currencies among the citizens the opportunity to obtain financial assets at a lower price.

"The cost for those wishing to exit the Turkish market will be high," he said. "Those who try to speculate on the price of foreign currencies expose themselves to great risk, and the cost for those with fixed incomes will be limited due to the slight impact on the rate of inflation, as the Turkish economy has self-capabilities to produce basic commodities, especially agricultural." Food, which protects the country from the risks of import inflation. "

Regarding solutions, Errol stressed the need for the Central Bank to take a set of measures that limit dealing with the dollar inside the economy, as well as not to allow the circulation of the pound outside the country during the coming months at least so as not to exploit this in speculation on the pound abroad, and to make reductions in its value without justification. .

Errol believes that Turkey and many countries should take the initiative to conclude their trade agreements in local currencies, indicating that "this measure can enhance import and export between these countries, enhance industry and production, and relieve the great pressure on these countries in order to secure foreign exchange."