The Benefits and Drawbacks of Exchange Rate Increases for the Turkish Economy
The detention of Istanbul Metropolitan Municipality (IMM) Mayor Ekrem İmamoğlu led to widespread protests in Turkey, which not only caused political unrest but also triggered significant fluctuations in exchange rates and stock indices, leading to major economic shifts.
In this article, we present an expert’s analysis on how and to what extent these exchange rate fluctuations could negatively impact the Turkish economy.
Central Bank’s Intervention
Initially, it was suggested that the Central Bank’s intervention might amount to $20 billion. However, it was later confirmed that the intervention was approximately $8.5 billion. The Central Bank also introduced Turkish Lira-settled forward foreign exchange sales, which helped reduce demand for foreign currency. Despite these measures, the market remains highly volatile, making it difficult to predict the direction of the exchange rate. However, the US dollar is unlikely to drop below 36 Turkish Lira.
Economic Policies and Exchange Rate
It is emphasized that economic policies should not allow rapid exchange rate increases. While it is difficult to predict whether the exchange rate will accelerate or stabilize, the current economic framework suggests that a continued rapid rise in the exchange rate is unlikely.
Impact of İmamoğlu’s Detention: If Ekrem İmamoğlu’s detention leads to his arrest and the appointment of a trustee to the Istanbul Municipality (a likely outcome given the charges), there is potential for another significant exchange rate jump similar to the one previously seen.
Benefits of Exchange Rate Increases for Exporters
The rise in exchange rates is generally seen as favorable for exporters, as it boosts export revenues and benefits firms that earn foreign currency. This has long been an expected outcome. However, a rapid rise in the exchange rate also increases the cost of imports. Many exporting companies are also importers, which means that the impact of a rising exchange rate is not one-sided.
Impact on Ordinary Citizens
Ordinary citizens are directly affected by exchange rate increases, as it leads to higher living costs and reduces the purchasing power of the Turkish lira. Interestingly, some may secretly hope for the exchange rate to rise, believing it would make Turkey cheaper for foreigners and reduce domestic costs. However, the reality is that living costs will increase, making it more expensive for locals.
Those saving in foreign currencies or gold may see the exchange rate increase as a positive development for their savings.
Private Sector’s Situation
The private sector, especially those with foreign debt, is significantly impacted by exchange rate increases. As of 2024, the private sector’s foreign debt stands at around $266.6 billion, with a substantial portion of it being short-term debt. The rise in exchange rates increases the cost of servicing these debts, putting financial pressure on companies, especially those that do not earn significant foreign currency.
Private Sector Foreign Debt Payments
According to Central Bank data, the private sector is expected to pay approximately $50-57 billion in foreign debt annually. A rise in exchange rates makes these payments much more expensive. For example, if the US dollar rises by just 1 lira, the private sector’s foreign debt payments increase by 50 billion lira. A 5-lira rise would increase the cost by 250 billion lira.
Impact on Inflation
The increase in exchange rates has direct, indirect, and exploitative effects on inflation. It drives up the prices of goods and services, leading to higher inflation. Although limiting exchange rate increases might help manage inflation to some extent, there has been no clear success in this regard.
Central Bank’s Interventions and Market Effects
While the Central Bank’s interventions have temporarily limited exchange rate increases, demand for foreign currency continues. The market remains volatile, and predicting future movements is extremely difficult. The rapid changes in the currency market make it harder to stabilize the exchange rate.
Conclusion: While a rise in exchange rates may benefit exporters, it poses a significant financial burden for companies that rely on imports and have foreign currency debt. Ordinary citizens are likely to experience higher living costs and inflation due to the exchange rate increase. As such, the impact of exchange rate increases is complex and multifaceted, with both benefits and drawbacks for the economy.
Source: ekonomim.com/kose-yazisi/kur-artsin-artsin-da-ya-bunun-sonuclari/807350?
Excerpt from article by ALAATTİN AKTAŞ (edited & translated by BTT)
