‘TURKISH LIRA’ & ‘PAKISTANI RUPEE’ GOES TUMBLING DOWN - Akshul Agarwal

Central banks around the globe are all currently staring at inflation rates that have been unseen in more than 2 decades. Labor shortages and supply chain problems, combined with a sharp rise in food and energy prices, have pushed the price in major economies. Inflation is something which when increased upsets everyone. Look at how we reacted to the rising fuel prices. This has become a kind of a norm everywhere and everyone is complaining about something or other. Whether it's Americans who are complaining about costly meat or Europeans complaining about electricity bills. And now Turkish Lira, Pakistani Rupee, and Iran’s Rial all are facing depreciation against the USD.

What is going on?

“Turkish Lira” is depreciating quickly. Turkey has cut down its interest rate by 4 percentage points in line with the Turkish president's wishes despite inflation already hovering around 20% and is expected to rise. It has nearly lost 40% of its value within a year and is now being referred to as the world’s worst-performing major currency. This sudden and high decrease is attributable to the policies adopted by the government.

The same thing is happening with the ‘Pakistani rupee’ which has weakened by 20% in the past 3 months. It is believed that the high demand for the greenback and uncertainty associated with the country's deal with the International Monetary Fund to get a tranche of $1 billion in the loan are the major causes.

How have people been infected?

The devalued currency has driven prices higher, in turn making fuel, imports, and everyday goods becoming more expensive. Meanwhile, the rents have skyrocketed. People started to cut down excessively on their consumption & needs which will badly impact the economic growth of the country.

What has led to this disaster?

The Turkish president has been pushing for low borrowing costs to boost growth and exports, create jobs and stimulate the economy. This allows businesses to grow at a more affordable rate. An excess of sorts is the outcome of this low-interest regime. Investors are dumping the currency with little confidence is what makes the Turkish lira a freefall. An excess of something isn’t a good idea.

Any central bank in this position would try to mop this extra supply to stabilize their economy. They will raise the interest rate for the short term to suppress inflation. However, Mr. Erdogan thinks otherwise. He has been a long-time opponent of high-interest rates and believes that low rates will help the country produce more goods and in turn tame inflation.

The major issue persisting with Pakistan is that its debt has been doubling every 3-4 years and now they are in a debt trap because of excess borrowing and inefficiency in utilizing the money. Recently, they got 3 billion $ from Saudi Arabia which could be a relief at this time.

What can policymakers do?

Generally, there are three policy tools to tackle this problem – raise the interest rate, sell foreign exchange reserves, and impose capital controls. All three aim to take the pressure off the domestic currency. However, Turkey's regime is not enthusiastic about raising the interest rate. They also can’t sell foreign reserves because they have negligible holding. That leaves capital controls, which is perceived as an extreme measure and would imply Turkey withdrawing from the international financial system.

Perhaps they must raise interest rates only like the last time in 2018 when they grappled with the same issue. What Turkey needs is a carefully designed stabilization program with buy-in from most of the society and with an independent central bank. These changes are unlikely to happen with the current regime.