The Turkish lira took an unprecedented nosedive against the dollar on Friday while the country was awash with its worst corruption scandal for years. This has put Turkey’s political and economic security under the spotlight.
Earlier this afternoon, the currency was below TL 2.095 to the dollar, the latest slide in a week marked by the US Federal Reserve’s decision to put a brake on monetary stimulus and following the arrest in Turkey of three sons of cabinet ministers in a scandal allegedly involving millions of dollars in bribes.
The lira’s decline came despite an announcement by Turkey’s central bank that it could increase foreign exchange sales by up to 10 times the ordinary minimum of $50m, to defend the currency.
“[The] deepening turmoil in Turkey is not just political,” tweeted Strobe Talbott, head of the Brookings Institution. “[The] stakes are geopolitical. Stable, secular, moderate state is crucial to region and world.”
The central bank has been reluctant to increase headline interest rates when Prime Minister Erdogan has frequently denounced the attempts of a shadowy “interest rate lobby” which he says is trying to impede Turkey’s growth. Ozgur Altug of BGC Partners in Istanbul said that the bank’s net reserves of about $42bn are equal only to about two months of imports.
Turkey is reliant on short-term capital inflows to underwrite more than 80 per cent of its current account deficit of more than $60bn.
“The lira’s underperformance will make it harder for the central bank to keep its explicit commitment not to hike rates since defending the currency through selling foreign exchange alone is unlikely to be effective,” added Ilker Domac of Citigroup.
The government attributes its current predicament to a plot. “This dirty game, this operation and these traps are intended to affect [next year’s] local and presidential elections by breaking the bonds of love with our nation,” said Bekir Bozdag, deputy prime minister, on Friday, referring to the corruption investigation. “The [ruling] AK party and the government has its head held high – and will continue on its way.”
More than 50 people have been arrested following an anti-corruption investigation.