The lira hit a record low of 6.24 per dollar on Friday, before recovering to 5.92 — still down a whopping 7 percent on the day. The currency has fallen 66 percent since the start of the year, pushing up the cost of goods for Turkish people and shaking international investors’ confidence in the country.
One of the triggers of the turmoil has been a standoff with the U.S. over a detained American pastor that Turkey, a NATO ally, has put on trial for espionage and terror-related charges linked to a failed coup attempt in the country two years ago.
Washington has demanded the pastor’s release and imposed financial sanctions on two Turkish ministers and warned of additional measures. High level meetings in Washington between U.S. and Turkish officials ended this week without an apparent resolution.
Meanwhile, investors are worried about the economic policies of President Recep Tayyip Erdogan, who won a new term in office in June with sweeping new powers.
Erdogan has been putting pressure on the central bank to not raise interest rates in order to keep fueling economic growth. He claims higher rates lead to higher inflation — the opposite of what standard economic theory says.
Independent analysts argue the central bank should instead raise rates to tame inflation and support the currency.
In modern economies, central banks are meant to be independent of governments to make sure they set policies that are best for the economy, not politicians. But since adopting increased powers, Erdogan appears to have greater control over the bank as well.
Erdogan on Thursday portrayed the currency drop as a “campaign” to harm Turkey and called on the people not to worry.
“If they have their dollar, we have the people, we have Allah,” he said.
Last week, he called on Turks to convert their foreign currency and gold into Turkish lira to help the currency.
Treasury and Finance Minister Berat Albayrak — who is Erdogan’s son-in-law — was scheduled later on Friday to outline a “new economic model.”
The currency drop is particularly painful for Turkey because the country finances a lot of its economic growth with foreign investment. As the currency drops, Turkish companies and households with debt in foreign currencies see their debts expand.
Coupled with an inflation rate of nearly 16 percent, that could cause a lot of damage to the local economy.
Foreign investors could be spooked and try to pull their money out, reinforcing the currency drop and potentially leading to financial instability.
Aylin Ertan, a 43-year-old caterer in Ankara, said she was concerned over the future of her small business.
“The price of the food that I buy increases day by day, the fuel that I put in my car to distribute lunches is more expensive, but I cannot raise my prices from one day to the next,” she said. “On some days, I end the day with a loss.”
Turkey’s woes shook world markets, pushing down stock indexes and lifting the dollar, which traders around the world typically buy in times of concern.
On Friday, the euro sagged to a 13-month low against the dollar, down 0.7 percent to $1.1450, after the Financial Times reported that the European Central Bank was worried about possible losses at eurozone banks operating in Turkey.
But analysts say that while there may be losses at banks, Turkey’s economic problems do not pose a big threat to Europe or other big economies, like the United States.