By Swann Collins, investor and consultant in international affairs – Eurasia Business News, November 27, 2021

The Turkish currency lira has been falling to historic low over the past few week. On November 23, the lira lost 13% of its value in a few hours against the dollar and approached 13 lira for a dollar, a level never before reached.

What are the roots of this fall ? Since 2018, the Turkish central bank, has given in to the pressure imposed by President Recep Tayyip Erdogan, who has repeatedly called for a cut in key rates to stimulate economic growth. That meant creating money through more loans. The result was rapid. This extensive monetary policy has put Turkey on track to achieve growth of around 10% this year, however with inflation of almost 20% on an annual basis. Basic goods for Turks have soared in price and their local currency wages are strongly devalued. The Lira has lost more than a quarter of its value against the dollar since January 2021.

The Turkey’s central bank has lowered its key rate by 300 basis points since August 2021, bringing it down to 16%. This means that the Turkish real interest rate, i.e. the interest rate minus inflation, is now negative. That leads to a devaluation of the Lira and an incentive for Turkish citizens and investors to buy gold and foreign currencies.

We can expect that in order to support the value of the lira, the Turkish central bank would continue purchasing gold in the coming months. However, the depreciation of lira will make gold prices, labelled in dollars, more expensive for Turkish state.

Moreover, the central bank may not increase the key interest rates, a measure that would cool inflation, since the Turkish President Erdogan prefers to support economic growth at all costs. Key rate will continue to decline and the Turkish government will not change the economic program, said the President Recep Tayyip Erdogan during a speech in Izmir, claiming that “foreign agents” were responsible for the fall of the Turkish lira, which caused the protests in the country.

Three central bank chiefs have been fired in roughly two years over monetary policy differences with the President. In March 2021, Mr. Erdogan dismissed the head of the Central Bank, who decided to sharply raise the rate, which provoked a further fall in the lira. Over the year, the currency has lost more than 40% of the price.

In November, after a new rate cut designed to stimulate the Turkish economy , the lira exchange rate has reached an all-time low. On November 23, residents of Istanbul and Ankara held protests against the President Erdogan. Following the protests, the General Directorate of Security of Turkey opened criminal cases over posts on social networks calling for actions.

The monetary problem faced by Turkey today is the same one that hit countries which have played with money supply and inflation, in an attempt to boost growth at all costs and secure political gains.

In the Middle East, the largest owner of gold is Turkey. In 2017, the Central bank of the Republic of Turkey started to buy gold on a regular basis and added a net 325 tonnes through to July 2020. After its own gold reserves peaked at 441 tonnes, the CBRT embarked on a series of disposals worth 106 tonnes in Borsa Istanbul (BIST) between August-December in 2020.[1] The Turkish central bank was storing 407.6 tonnes of gold in the second quarter of 2021, reported the World Gold Council.

In the second quarter of 2021, the largest increases of gold reserves in central banks were for Thailand (+ 90.2 tonnes), Brazil (+53.75 tonnes), Turkey (+8.67 tonnes), India (+8.40 tonnes) and Qatar (+ 3.12 tonnes).

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© Copyright 2021 – Swann Collins, investor and consultant in international affairs.

[1] LBMA, “Spotlight on the Turkish Gold Market 2021”, August 2021 : https://cdn.lbma.org.uk/downloads/Publications/Spotlight-on-the-Turkish-Gold-Market-2021.pdf ;