With Turkey’s inflation surging and a balance-of-payments crisis looming, Turkish President Recep Erdogan has been forced to row back on his economic policy.
The fact that Erdogan was cutting interest rates at a time when most major central banks wereAside from causing the economy to overheat and inflation to rip, Erdogan’s approach caused the currency, the Turkish lira, to plummet and Turkey’s balance of payments to deteriorate.
The Turkish Lira hit a record low, rattling global currency markets and falling 8 percent against the dollar.Indeed, the central bank’s international reserves have dipped into negative territory despite the fact that the bank has borrowed very large amounts of foreign exchange deposits from the domestic banks.
How long can Turkey rely on the kindness of foreign governments to help finance its gaping external current account deficit? The key ingredient of any policy strategy to address Turkey’s deep economic problems would be the early restoration of domestic and foreign investor confidence. However, given Erdogan’s highly erratic economic policy record, it’s doubtful that those first steps will be nearly sufficient to restore investor confidence and stabilize the economy.
It could do so by providing Turkey’s economic policy with a much-needed seal of approval and by offering large-scale financing to help meet its immediate external financing needs.
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