Turkish Lira: What Can Stop the Free Fall? 2

The central bank of Turkey takes action

The nosedive in the Turkish lira has put immense pressure on the Türkiye Cumhuriyet Merkez Bankası – the Central Bank of Turkey.

In order to alleviate some of that pressure, the bank took measures on November 10 to support the Lira. It reduced banks’ borrowing limits at the Interbank Money Market to 22 billion liras, effective from January 11, 2017.

It also reduced the foreign exchange reserve requirement ratios by 50 basis points across maturities. According to the bank, this measure would add $1.5 billion in liquidity to the financial system.

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Efforts to no avail

The aforementioned measures did not provide any respite for the lira, with the currency dropping to fresh lows against the dollar and the euro.

Market analysts have held that security concerns and domestic factors pointing to political uncertainty are the primary reasons for the decline in the currency.

The government’s proposed constitutional changes and resistance to enact crucial reforms, according to some, have taken their toll on economic indicators such as the current account balance. President Recep Tayyip Erdoğan is trying to get draft changes to the constitution through the Parliament which would expand the scope of his authority. A public referendum for approving these changes is likely this spring.

The official line

On the other side of the argument are government officials, including the President, who have continued to claim that external influence has been driving down the lira.

The Hurriyet Daily News reported that Cemil Ertem, a senior adviser to the President, has claimed a conspiracy emanating from overseas which is giving rise to speculator activities and hurting the lira. He was quoted saying that “there’s an operation going on to quickly devalue the Turkish Lira. This is not a conspiracy theory. It’s a very clear reality.”

Meanwhile, the Economy Minister Nihat Zeybekci tried to reduce focus on the currency by saying that “the exchange rate is not more important than the current account, deficit, employment, growth or inflation.”

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