Turkey Financial Crisis 2018

Turkey Financial Crisis 2018

Turkey Financial Crisis 2018 – बदहाल है टर्किश लीरा – Current Affairs 2018

The Turkish currency and debt crisis of 2018 (Turkish: Türkiye döviz ve borç krizi) was a financial and economic crisis in Turkey. It was characterized by the Turkish lira (TRY) plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults.

The crisis was caused by the Turkish economy’s excessive current account deficit and large amounts of private foreign-currency denominated debt, in combination with President Recep Tayyip Erdoğan’s increasing authoritarianism and his unorthodox ideas about interest rate policy.

Some analysts also stress the leveraging effects of the geopolitical frictions with the United States and recently enforced tariffs by the Trump administration on some Turkish products such as steel and aluminum.

While the crisis was prominent for waves of major devaluation of the currency, later stages were characterised by corporate debt defaults and finally by contraction of economic growth. With the inflation rate stuck in the double digits, stagflation ensued.

The crisis ended a period of overheating economic growth under Erdoğan-led governments, built largely on a construction boom fueled by foreign borrowing, easy credit, and government spending.

 

Current account deficit and foreign-currency debt

Previous economic growth had been led by fiscal and monetary stimulus to the construction industry, resulting in a huge backlog of unsold new houses, and unprofitable grand projects like the Yavuz Sultan Selim Bridge.

A longstanding characteristic of Turkey’s economy is a low savings rate. Since Recep Tayyip Erdoğan assumed control of the government, Turkey has been running huge and growing current account deficits, $33.1 billion in 2016 and $47.3 billion in 2017, climbing to US$7.1 billion in the month of January 2018 with the rolling 12-month deficit rising to $51.6 billion, one of the largest current account deficits in the world.

The economy has relied on capital inflows to fund private-sector excess, with Turkey’s banks and big firms borrowing heavily, often in foreign currencies.

Under these conditions, Turkey must find approximately $200 billion a year to fund its wide current account deficit and maturing debt, while being always at risk of inflows drying up; the state has gross foreign currency reserves of just $85 billion.

The economic policy underlying these trends had increasingly been micro-managed by Erdoğan since the election of his Justice and Development Party (AKP) in 2002, and strongly so since 2008, with a focus on the construction industry, state-awarded contracts and stimulus measures.

Although, research and development expenditure of the country (% of GDP) and the government expenditure on education (% of GDP) are nearly doubled during AKP governments, the desired outcomes could not been achieved The motive for these policies have been described as Erdoğan losing faith in Western-style capitalism since the 2008 financial crisis by the secretary general of the main Turkish business association, TUSIAD.

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