Lira outlook: That sinking feeling?

Originally appeared on Bosphorus Consulting on 23 January 2014

With the lira dropping markedly against the dollar – it has lost 11% of its value against the dollar in the period from 17 December to 23 January – and Turkey’s Central Bank reacting in way that many analysts describe as highly unorthodox, there are serious concerns that exchange rate volatility could undo years of sound economic progress.

According to an article featured in the International New York Times (“Economic success falls victim to political chaos”, 21 January 2014), the ongoing depreciation of the lira brings into question the Turkish government’s ability to bring inflation under control. The same article adds that in the last six months, Turkish reserves of foreign currency have increased from from $20 billion to $188 billion, reflecting the concerns of businesses and consumers.

The Financial Times (“Turkish lira tumbles to series of record lows”, 21 January 2014) finds these developments particularly troubling given that the Central Bank’s efforts to bolster the currency appear to have had no effect whatsoever apart from depleting the country’s foreign exchange reserves (already at record lows). With little end in sight to the current political impasse, the newspaper rightly wonders how long foreign investors will put up with a lira in seemingly perpetual retreat.

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