Turkey witnessed a historic night on Monday after the statements made by President Recep Tayyip Erdogan when announcing that the government will take new measures to prevent the decline of the Turkish lira against the US dollar. The price of the dollar fell sharply within minutes, from the rate of $1 equal to 18 Turkish liras.
In his speech, Erdogan announced economic measures and financial alternatives to calm citizens’ fears caused by high exchange rates. The subsequent boost to the Turkish lira after these statements showed that the rise of the US dollar against the lira in recent weeks was not due to the collapse of the Turkish economy, nor did it reflect the real value of the Turkish currency. It was the result of manipulation by speculators. The lira’s recovery also demonstrated that government reassurances can help to protect the value of the national currency from the interventions of the Central Bank.The economic measures and financial alternatives that Erdogan announced, the details of which were explained by Turkish Treasury and Finance Minister Nureddin Nebati on Tuesday, allow depositors to realise the same potential profits for foreign currency savings by keeping their assets in liras. According to the new system, if the profits of depositors in banks in Turkish lira are greater than the increase in the dollar exchange rate, they will maintain their profits, but if the increase in the exchange rate is greater than their profits, the difference will be paid to them through tax exemptions. In other words, the government is saying to citizens, “Leave your money in Turkish lira and do not convert it to dollars, and if you profit, it is yours, and if you lose something because of the rise in the price of the dollar, the government will make up for your loss.”
The latest decisions also aim to reassure businesses about the price of the US dollar by setting a long-term exchange rate through the Central Bank, so that they do not have problems in setting prices, or do not withdraw their dollars from the market and collect as much as they can to use to pay any future debts abroad. Now, businesses will not find it difficult to determine costs and profits, and they will not be afraid of the possibility of an unexpected rise in the price of the dollar at the time of repaying their debts abroad.
Many citizens who avoid depositing their money in banks for various reasons, buy gold to maintain the value of that money and often keep the gold at home. Such “money under the mattress” is estimated to be around 5,000 tons of gold worth $280 billion. The Turkish government is seeking to develop new ways to encourage citizens to bring their gold into the financial system, rather than keeping it idle at home.
Pro-government Turks enjoyed Monday evening’s fall in the dollar rate against the lira. For some, it was similar to how they felt after the failed 2016 coup attempt, not least because they regard the crisis hitting the value of the Turkish currency as another attempt to overthrow the government. Its failure is a victory for the country over economic tutelage.
Erdogan’s surprise speech revealed that he is not fighting this battle without cards to play, and it raised the morale of government supporters and boosted confidence in the success of the new economic model that the government seeks to implement. It is expected that the improvement of the Turkish lira will reflect positively on prices and inflation. Some companies have already announced price reductions for their products having raised them a few days earlier due to the rise of the dollar.
The political opposition in Turkey has been exposed by Monday’s move by Erdogan, as it was banking on the dollar’s continued rise against the lira so that it could incite the Turkish people against the government and force it to hold an early general election. The sadness that many of the opposition felt on that night was visible on their faces; they clearly hoped for the collapse of the national currency and the country’s economy for the sake of their own political interests.
The Turkish government won an important round after the improvement of the Turkish lira, but the economic battle is a long one so more can be expected. However, this victory gives a great opportunity for the success of the new economic model based on production and export, in light of the numbers and indicators that indicate the solidity and growth of the Turkish economy. It is a unique Turkish model that deserves study, even if it is similar in some respects to other economic models, such as in China because the Turkish leadership stresses that its decisions will remain within the circle of democracy and the rules of the free market.
This article first appeared in Arabi21 on 22 December 2021
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.