ASSIGNMENT-2

Impact of currency crisis on

TURKEY
Rifat Anjum Raka
1711010030
North South University
 to 20%.
BACKGROUND
In recent years, Turkey has been growing
economies in the world but impressive growth
numbers were stabbed by foreign currency debt.
The country’s borrowing resulted in deficits in
both its fiscal and current accounts and also the
main problem with Turkey is that it doesn’t have
large enough resources to save the economy
when things go wrong. The most interesting fact
for Turkey is President Recep Tayyip Erdogan’s The Turkish company mainly has transactions
preference to keep interest rates low even mostly in lira and plenty of US dollar debt to
though inflation is more than three times the repay or roll over. As far, Endogan told the Turks
central bank target. to ignore exchange rates but the problem is that
all the Turkish companies will need US dollars to
repay the debt for years.

One of the main sources to boost the economy

is foreign financing. And in this world of low-
interest rates the Turkish company was happy to
borrow in US dollars through pushing the gross
Also, Turkey’s economic crisis has dug deeper external debt above $460B or around 53% of the
when Donald Trump announced doubling the GDP. Turkey’s foreign company loan accounted
US import tariffs on Turkish steel and aluminum. for 57% of the country’s nominal GDP in 2018
The Turkish lira sunk by more than 20% against compared with a ratio of 53.4% in this previous
the dollar after the announcement by US year. The data revealed an all-time high of 57.1%
President. It has revealed an increase in US taxes in Dec 2018 and a record low of 26.1% in Dec
on Turkish Steel imports to 50% and aluminum
1990. highly dependent on foreign goods, the majority
of goods, such as food, gasoline, clothing, and
furniture were affected highly.

Turkey was unable to create a constant

economic policy which includes a reduction in
government spending and restricting the supply
of many to respond to the currency crisis.
Instead, the government has firmly blamed the
crisis on foreign powers where the US President
as the major suspect.
In August 2018, Inflation in Turkey is out of
It was an almost shocking night for Turkey to see
control. The inflation rate increased to almost
a sudden reduction in the lending rate in 2018.
18% which has the highest recorded among 15
years-long journeys, powered by the Turkish The rate decreased to 15.50% in October from
lira’s collapse of over 20% during December. As 18% in September of 2019. The lending rate in
per analysts, the central bank has to increase Turkey averaged 32.24% from 1996 until 2019,
rates a minimum of 4% which other quarters reaching an all-time high of 23% February of
claim an increase by 10% is required to dodge 2001 and a record low of 6.50%in May 2013.
further depreciation in the lira’s value. Although
the main interest rate in Turkey at 17.75% is
impressive in nominal terms, inflation is bound
to exceed that number unless lira recovers.

If we now look at the current account deficit

where exports cannot match the pace of import
growth. Actually when there's a lot of money,
then it tends to have a high demand for
domestic and foreign financing. So, trade deficit
IMPACT ON OVERALL and inflation occur when demand exceeds
production. And Turkey got both problems.
ECONOMY Normally a central bank increases interest rates
to make balance with the supply but the bank's
The Turkish lira lost about one-third of its value hands were tied as per President Erdogan who
against the US dollar just over less than a single was seeking growth at all costs. As a result, a
month. This change has recently recorded as a high current account deficit increases
historical low. For this huge impact, every dependency on currencies.
imported good becoming even more expensive
almost overnight. As turkey is a country that is
Due to the currency crisis, Turkey is facing high
credit growth that is problematic for Turkish Gross fixed capital formation (investment), which
banks. Turkey not only used foreign but also constituted around one-third of GDP, recorded
local credit to fuel the economy. So, this tends to by 12.9% in the last quarter year on year and by
grow credit at 20% which is definitely not a sign 1.7% overall in 2018. Government spending only
of stability and too bad for the economy in the increased by 0.55 and 3.65 annually. The
Turkish lira. If this problem continues then the Contributed of agriculture and services dropped
banking sector could be exposed soon. by 0.5% and 0.3% respectively while
manufacturing and construction a critical driver
of growth in the last decade were hit hardest,
contracting by 6.4% and 8.75 in the last quarter.
The only major concern to the negative trend
was net exports, which grew by 10.6% in the last
quarter and by 7.5% overall in 2018 with the
help of a significantly weaker Turkish Lira (TRY)

As the currency crisis in Turkey abates, the

economy and Turkish consumers suffer from
sky-high inflation and surging loan rates. Thus, it
has created an officially entering a technical
recession. As a result, GDP dropped from 7.4%
to 2.65 in 2018 which is even below the revised
government target of 3.8% announced in Their trade balance improved in the second half
September 2018. of the year because there was a fall in domestic
demand and the companies resorting to their
inventories instead of importing goods. Exports
increased by $11B to $168B while imports fell by
$10.8B to $223B, thereby reducing the trade
deficit for 2018 to $55B from $76.8B in 2017. and briefly dipped below 7 against the USD on
August 10 at the height of tensions with the US,
the TRY started to recover part by 625 basis
points to 24% and this was the biggest hike of
all time nearly 16 years.

The graduate fall in foreign investor confidence

in the economy due to macroeconomic
imbalances resulted in net capital outflow in
2018. Portfolio investment tuned from $24.4B
inflow in 2017 to a $3.9B outflow in 2018 just
because of having helped finance the current The consumer inflation rate rose to 17.9% by the
account deficit (CAD) in 2017. During the August end of August and then to 25% in October,
currency crisis when capital flight reached $14.8B before recovering to 20.3% at the end of 2018 as
and was partially reserved only after the straight per TUIK figures. The average difference
CBRT rate hiked in September, the CAD was between consumer and producer price inflation
financed by reserves and net errors and is 10.5% with producer price increasing 46 and
omissions. 45 % year on year in September and October.
Higher inflation may negatively affect real
It was observed that nearly $10.3B of CAD was wages.
financed by CBRT through its foreign currency
reserves while the recorded net result of inflow
of $21.1B (highest exceeding $11.1b recorded.
Official reserve assets of CBRT fell by 13.6% to
$93B and also driven by the fall in foreign
currency reserves from $86.6B to 71.3 B while
gold reserves are also recorded down to 20.1B
from 23.5B. After excluding its liabilities to the
banking system.

As per TUIK Statistics, unemployment increased

to a nine-year high at 13.5% year on year in
December 2018, whereas the Government has
estimated the unemployment rate at 11.3%. The
unemployment rate increased by 1 million to 4.3
million compared to December 2017 where
youth unemployment increased by 5.3% to

During the crisis, TRY cost 40% of its value

against USD in 2018. Having begun 2018 at 3.77
24.5%. (20.8% in 2018, compared with BBVA Research’s
forecast of 21.5% and 15.9% in 2019). The
government is forecasting a rapid correction of
the current account deficit (from 4.7% of GDP in
2018 to 3.33% in 2019) and with favorable an
average exchange rate more favorable than
expected by BBVA.

RECOVERY
Turkish currency crisis started to recover slowly
from 29th November 2018 with the Lira hitting a
4-month higher in value against the US dollar. It
In addition, the gross domestic debt stock of the is successfully able to recover from 7.0738
public and private sector fell from $453.3 billion against the dollar to 5.17 on 29 th November
in 2017 to $448.5 billion in 2018. 2018. It has an increasing rate of 36.8%. Still its
recovering currency crisis with expecting that the
inflation to decrease through the positive
exchanges, discounts on products and tax cuts.

LEARNING FOR
BANGLADESH
Turkish economy in a deep crisis occurred due to
the stubbornness of the Turkish authorities and
APPLICATIONS OF government.
GOVERNMENT POLICY
After the hike in interest rates by CBRT on
 The Turkish government still did not
come up with a solid economic policy
September 13(625bps from 17.75% to 24%), the
plan that would include a cut in
Turkish government on 20th September 2018,
government spending and curbing the
uncovered a new economic program for the next
money supply. He rather accused
three consecutive years(2019-2021). That is reign
“Foreign powers” of the mess by Trump.
inflation, speer growth and cut the current
In the case of Bangladesh, the
account deficit. The plan includes a reduction in
government must have to be a fast
government expenditures by $10 million.
mover in settling down any economic
Moreover, it will be focusing on value-added
crisis with a solid economic plan.
areas to increase the country’s export volume
and long term production capacity with a target  Concern about the international
to create 2 million job opportunities by 2021. monetary system is a must as it subject
According to BBVA Research, a report released to massive waves of liquidity expansion
where they recorded that both monetary policy and contraction. Rising liquidity can
and fiscal policy are now on the better path create a current account imbalance that
geared towards correcting inflation and the is one of the main reasons behind the
imbalances of the Turkish economy with Turkey currency crisis. So this
inflation rate more in line with market mechanism helps the price level to
expectations and with the forecast by CBRT adjust and rectify surplus and deficit.
 The low income and middle-income
 We have seen so far, how important the
countries like Bangladesh can be the
exchange rate for turkey and that the
victim of the currency easily if they
country will need US dollars for going
don’t pay importance in managing
forward. From that perspective, a
the international monetary system.
conflict with the US is a totally bad idea.
 As per the comparison, Turkey is not like Erdogan claimed to seek alliances
the only economy with “twin” deficits elsewhere, securing investment pledge
and high amounts of a foreign currency from Qatar and reaching out to Russia
debt. For Example, if you take a look at and Germany but sad for him, he really
Indonesia, it also runs fiscal and current needs to find a reconciliation with the
deficits and its foreign currency US to even hope to resolve the currency
borrowing is roughly 30% of GDP. But crisis.
not like Indonesia, Turkey lacks having So this matter is very crucial in the
enough reserves to rescue the economy case of Bangladesh as Bangladesh’s
when things go wrong. As per research economy is dealing mainly with
firm Credit Sights, Turkey’s reserves are foreign currencies. So good relation is
notably low compared to its $181 billion a must.
short term debt denominated in
currencies other than Turkish Lira. BANGLADESH
In the case of Bangladesh, they need
to accumulate enough reserves COMPETITIVE POSITION
beforehand to tackle the economy
when things go wrong. ON CURRENCY BASIS
 Turkey would have the chance to Bangladesh has total foreign currency loan-40
become a wealthy country with better million along with Trade-deficit 10-20 million
economic management because of its which is really low. But still, it can believe that
diversified economic structure. Turkey’s depreciation of taka vis-à-vis foreign currencies-
domestic financial system is flexible and especially US dollars will boost Bangladesh
resilient. export earnings. And it going be true only if our
For Bangladesh, it is required to exports are priced or invoiced in Bangladeshi
create a flexible atmosphere in the Taka.
domestic financial system and setting
down internal disputes from It is also observed that, when exports are priced
politically, economically and hassle- under local currency, a depreciation of Taka will
free paths for investors to hold their expose almost equal reduction of the price of
confidence towards our currency. locally made products. Taking into consideration
that exchange rates of our competing countries
 President Erdogan’s aspirations were to
such as India and Vietnam do not change, then
establish Islam-based authoritarianism
cheaper Bangladeshi Product going to lead
and his erratic, incoherent, and
higher international demand followed by higher
nepotistic economic policy puts Turkey’s
export earnings.
progress at risk.
So for the middle-income countries, The below comparison shows clearly the
Bangladesh has to be careful in Exchange rates growth with other trading
introducing those types of crucial partners. Bangladeshi Taka with its quiet stable
reforms so that it can not create harsh exchange rates can create benefits in the long
for the country’s economy. run.
Bangladesh: The USDPKR decreased by 0.53% to 155.1500
from 155.9800 in the previous sessions.
USDBDT traded at 84.6000. Historically the
Bangladeshi taka reached an all-time high of
85.10 In 2018 and a record low of 67.20 in 2008.

Summary:
More or less Bangladesh has all-time fixed rates
per USD which indicate greater certainty of
Vietnam: exporters and importers for Bangladesh. This
stability helps the government to maintain a low
The DVD increase 0.02% to 23.204 from 23200 in inflation rate by keeping interest rates down and
the previous trading session. stimulates trade and investment in the long run.

India:
The USDINR decreased by 0.49% to 71.5990
from 71.5932 in the previous sessions.

Pakistan: