One week after Naci Agbal, the governor of the Turkish central bank, raised interest rates President Erdogan removed him from that position. It resulted in ten percent drop in value of the already weak Turkish lira. It is from an economic perspective a totally irresponsible move that undermines the credibility of the Turkish central bank once more. President Erdogan’s lack of economic insight is putting Turkish entrepreneurs in an awkward position. As the Turkish lira continues to weaken importers face the problem that imported goods denominated in other more stable currencies like the dollar and the euro become relatively more expensive when the Turkish lira continues to weaken due to weak policies. This leads to so-called imported inflation, where imported goods drive up price levels in weak currency states.
For many economist this is enough information to understand that something needs to be done to manage the exchange rate. However, the Turkish President continues to emphasize that raising interest rates is not the way to go, it would according to him actually lead to higher inflation. The Golden Investor, like many other experts in the field disagree, raising interest rates leads to higher savings, less spending and more importantly to larger inflow of foreign capital in Turkish lira denominated assets, as high yield attracts investors.
Islamic Rules Are Against Income Out Of Interest
The most likely reason the above described economics-101 principle is not accepted in Turkey, is that it is not according to the rules of the Qu’ran. The Islamic rules clearly define that it is prohibited to make money with money. Therefore, raising interest rates is a sensitive issue in Islamic countries and many nations have developed a system in which banking is sharia-compliant. Modern day investing is clearly rejected by those nations who come-up with many creative ways to technically comply with Islamic law. However, Muslim nations have failed to completely abandon interest rates as it would lead to a credit crunch.
The Alternative Is Not Government Friendly
One way to stabilize inflationary pressure on the Turkish lira is to come up with some kind of currency board in which each Turkish lira can be exchanged with a stable asset, like gold or the U.S. dollar. This fixed exchange policy has its drawbacks as speculative attacks could destabilize the commitment and with an unpredictable and irresponsible Turkish President the risks for potential attacks are rather high. Moreover, it would mean that President Erdogan has to give up his central bank’s ability to issue new currency to finance government spending. Higher interest rates or giving up monetary policy would both increase stability and boost the Turkish economy.
“Do you use dollar? Then stop talking about it”President Erdogan on the appreciating value of the U.S. dollar against the Turkish lira
Either way, the current situation is becoming increasingly difficult for many Turkish citizens. It remains uncertain how much the country can handle in its efforts to stop inflation. It will be interesting to see what happens this summer when economies worldwide are expected to reopen at full capacity again and inflation of the euro and dollar is also expected to increase. For now, The Golden Investor wishes the best for its Turkish readers and emphasizes that diversification of assets is the only things an individual can do in such a scenario. However, considering the booming Turkish gold market, many Turks have already discovered that themselves.
Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.