Turkey Caught in a Spiraling Lira Crises

This year has seen the Turkish Lira lose almost a quarter of its value, as the reluctance of the central bank to hike interest rates and surging inflation continue to stoke fears of yet another currency crisis. Turkey is not a stranger to busts and booms, along with sharp swings in its currency. Therefore, it is often regarded as one of the riskier emerging markets, as its current account deficits are quite substantial and the country has to depend on external financing in order to fuel growth policies that are rather unorthodox.

How it started for Lira

The late 2000 saw escalating concerns about the banking sector’s fragile health, which prompted banks in the country to prevent vulnerable investors and lenders from dumping their government bonds and stocks. Demir Bank collapsed and worsened the issues and emergency lines of credit were also halted for preserving domestic assets. The IMF gave $10.5 billion to Turkey which gave the central bank the chance to defend lira, but the currency had already plunged 25% by then. The lira worsened even further because of a political crisis that reduced confidence. The currency had already declined by one-third against the US dollar.

2013/2014 crisis

In May 2013, the Chairman of the Federal Reserve, Ben Bernanke announced that they would cut back on their asset purchases. The announcement hit several emerging markets, one of which was Turkey. The pressure was dialed up due to domestic problems, as a corruption scandal in the country resulted in a cabinet reshuffle and key ministers resigning.


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Therefore, policymakers were quite reluctant in stemming the fall of the Lira as President Tayyip Erdogan called for low-interest rates before local elections. In January 2014, the central bank had to step in because of the slide in the currency. There was an emergency meeting overnight and the interest rates were increased from 7.75% to 12%.

Washington Sanctions in 2018

There was a coup attempt in July 2016, so the country was undergoing some major political shifts. 2017 also saw a constitutional referendum that led to a switch to the presidential system from a parliamentary one. Erdogan said in May 2018 that they would tighten monetary policy and reduce rates, which led to worries about economic fragility.

Economic sanctions were imposed on Turkey by the US after an American pastor was detained on charges of terrorism and the Lira experienced a 25% fall in one month alone. This resulted in an economic crisis that reverberated throughout the emerging markets.

Inflation in 2021-2022

From September to December last year, the interest rate was cut by almost 500 basis points, while inflation surged by almost 36% due to rising demands after reopening from lockdown and supply chain issues. In November, Lira fell by 30% and the central bank had to intervene to steady the currency. Early 2022 saw a couple of weeks of calm, but the currency crisis came roaring back because of the Russia-Ukraine conflict. The country’s inflation has already shot up by 70% and is expected to rise more, while President Erdogan refuses to cut rates.


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