Turkey's Economic Challenges and the Global Race for Stability ????

As the world watches the ever-evolving landscape of global economics, it's important to keep a close eye on the economic challenges faced by different countries. Turkey has been no exception, grappling with a series of economic issues over the past few years. ??

??The timeline from 2018 to 2022 outlines a complex set of events that impacted Turkey's economy. Currency depreciation, unorthodox interest rate policies, and high inflation rates contributed to economic turbulence. This period also saw shifts in monetary policy, challenges in the financial sector, and social consequences, including suicides related to financial difficulties. ????

?? As the world grapples with economic challenges, we observe a significant development in Turkey. Turkish President Recep Tayyip Erdogan secured his reelection despite a beleaguered economy and a rising cost of living. President Erdogan's reelection, while impressive, is overshadowed by the pressing financial crisis the country faces. The immediate post-election shift towards economic orthodoxy cannot magically restore the reserves depleted during the campaign period. However, the situation has raised concerns about the country's economic future.

?? Turkey's currency, the lira, has witnessed a steep decline, weakening by approximately 20% against the U.S. dollar since the beginning of the year. This plunge has sent shockwaves through the nation and left many worried about the prospect of even higher prices for essentials like housing and food amidst soaring inflation.

?? What's at the heart of this economic turmoil? Erdogan's unconventional economic policies have come under scrutiny. Instead of the conventional approach taken by central banks worldwide, which involves raising interest rates to control inflation, Erdogan has been pressuring Turkey's central bank to lower borrowing costs. The key policy rate was reduced from around 19% in 2021 to 8.5%, despite staggering inflation figures.

Balance of Payments Crisis: Turkey isn't grappling with a traditional fiscal crisis. Rather, it's confronting the risk of a classic balance of payments crisis. The imbalance between imports and exports, exacerbated by high inflation and a stable exchange rate, threatens the country's competitiveness and ability to bridge this gap.

Imminent Depletion of Usable Reserves: Turkey's reserves are depleting at an alarming rate. The external deficit in 2023 has primarily been financed by selling off the country's reserves. Turkey now holds around $50 billion in foreign exchange reserves, with approximately $19 billion in "unusable" reserves due to swap arrangements. Real usable foreign exchange reserves are only around $30 billion. This amount is insufficient to cover the current account deficit, which has been well over $5 billion per month.

Geostrategic Financing and External Support: Erdogan has historically secured funds from various sources, including strategic rivals and global actors keen to maintain influence. However, the question arises, at what point do the financial risks associated with Erdogan's unconventional policies outweigh the geostrategic interests in financing Turkey?

Debt from Borrowing and Balance Sheets: Turkey's central bank has borrowed substantially from domestic banks, resulting in high foreign currency liabilities. Turkey's foreign currency liabilities exceed its liquid foreign exchange reserves, emphasizing the importance of a holistic analysis of the nation's balance sheets.

?? In response to the economic challenges, there have been recent appointments of internationally respected financial experts, including former bankers, into key government positions. However, it remains uncertain whether these appointments will lead to a return to more traditional economic policies, as Erdogan has historically exercised a firm grip on the country.

?? The recent plunge in the Turkish lira has been attributed to a loosening of government controls over the currency. While this was seen as an attempt to address the crisis, it may have contributed to the currency's sharp decline. The uncertainty around Erdogan's stance on economic matters adds to this challenge.

?? High inflation is impacting the daily lives of Turkish citizens, making basic necessities more expensive. After the election government raised the interest from 8% to 35% which led to inflation from 80% to 40%.

?? There's hope for a return to "rational ground" with the appointment of financial experts. However, the path ahead is not clear, and it remains to be seen whether these changes will lead to stability or if further economic turbulence lies ahead. To avert a full-blown financial crisis, Turkey may need to consider a more orthodox approach to economic policy. The low levels of public debt relative to the size of the economy could be an advantage if Turkey can embrace the idea of seeking support from international organizations like the IMF.

The situation in Turkey serves as a reminder of the importance of sound economic policies in maintaining stability and the need for global collaboration in addressing economic challenges. ?? Turkey's experience underscores the importance of responsible economic governance and the need for clear and predictable monetary policies. The consequences of instability can be far-reaching, affecting not only financial markets but also the livelihoods of everyday citizens. ??

As Turkey joins the ranks of countries facing economic challenges, it's a reminder of the delicate balance that every nation must strike in today's interconnected world and make decisions keeping in mind the economy of the nation. ??

In an era of global economic interdependence, the fate of one country can have a ripple effect on others. Governments, businesses, and individuals must navigate these turbulent waters with a focus on stability, adaptability, and sound financial management. ????

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