Recent interest rate shifts in the US and other developed economies are likely to have consequences for emerging markets, and Turkey appears to be the first to be blamed. The lira plunged about 14% against the dollar on Monday in an initial crisis that is mostly Recep Tayyip Erdogan, but not entirely to blame.
This week’s lira production was caused by the dismissal of mr. Erdogan on Saturday from the head of the central bank. The main sin of the deposed monetary maestro, Naci Agbal, was to wage an aggressive fight against inflation. He raised the policy rate to 19% from 10.25% in an effort to stabilize consumer prices, which rose 15.6% year-on-year in February. Mr. Erdogan prefers to make economic growth as much as possible, regardless of inflationary consequences, and he seems to believe that higher interest rates can cause higher prices.
Mr. Erdogan’s bad economic management is not news. Turkey on its watch has suffered repeated crises of various kinds, recently with another rise in inflation that became a currency collapse in 2018. But two differences are noteworthy this time.
One is that investors have convinced themselves that Mr. Erdogan has finally seen the light of day for economic policy, claiming he is now surprised he did not. Agbal’s appointment in November, coupled with the resignation of Erdogan’s son-in-law who was finance minister, was announced as a sign that competent people would be in charge of macroeconomic policy. Yet Mr. Erdogan Turkey’s biggest economic problem and guess what, people: there’s still gambling at Rick’s.
The other new factor is the global economic environment, which is much less hospitable than during the last Turkish crisis two years ago. The pandemic is spreading economies everywhere, and Turkey has been particularly hard hit by the collapse of travel due to its dependence on tourism. With the summer holiday season in doubt, especially for the many European visitors to Turkey, it is not clear how the country can start earning from the financial hole.