Turkey, which had been experiencing unprecedented economic growth since 2003, has started sending out ominous signals in the past year, with investor confidence shaken and the lira plunging to a record low.
This week, the currency dropped to above 2.50 against the US dollar for the first time in its history, and has lost nearly 80 percent of its value since a corruption scandal in 2013, Al Arabiya News reported Friday.
Higher borrowing costs prevent inflation from spinning out of control, but also stymie the kind of economic growth that could be used as a political asset in the run-up to parliamentary elections in June. Turkey received only $43 billion in foreign direct investment last year, compared with $73 billion in 2013.
Oil Price Drop Helped
A drop in oil prices of more than 60 percent since June last year has greatly helped Turkey improve its balooning current-account deficit. Curbing domestic demand and pushing exports has also helped bring down the deficit by 30 percent to a four-year low.
Although the deficit of 5.7 percent of gross domestic product is close to the official target of 5 percent, foreign investors are still shunning Turkey as the Central Bank is struggling to maintain its independence in the face of unceasing assaults from the government.
A Challenge
The strangest part of the Turkish economic saga has been a war of words between President Recep Tayyip Erdogan and Central Bank Governor Erdem Basci. Erdogan, surprisingly, insists that keeping interest rates low will help curb inflation and boost growth, challenging economic orthodoxy.
Basci, however, is determined to keep interest rates steady for price stabilization. He said this week that keeping inflation at 5 percent would be a “great contribution” to the economy. The Central Bank has so far rejected demands to drop interest rates, and its determination has pushed inflation 1 percent back.
Turkey lost half its wealth overnight during an infamous crisis in Feb. 2001, pushing the incompetent coalition government out of power. In the final months of the former administration, then-Finance Minister Kemal Dervis designed a financial discipline that has also been pursued by the current government.
To finance its investments and subsidies, the government made a striking $61.2 billion from privatization. Even during the global financial crisis, Turks heavily borrowed thanks to the Federal Reserve’s low interest rates.
