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FOREIGN EXCHANGE

Turkish lira under pressure again as inflation and currency support costs bite

The currency’s fairly benign passage through the early months of 2022 is now under threat from a variety of factors, including spiralling inflation, the cost of supporting the currency and even a growing interest in cryptocurrency.

Turkish lira on Turkey map.jpg

After a period of relative stability during March and April this year, the lira’s downward trajectory once again picked up pace in May.

Turkey’s trade ministry has been keen to paint a positive picture, noting that use of the lira in foreign trade rose by 72% in the first three months of 2022. However, Mustafa Sonmez, a Turkish economist, and Atilla Yesilada, Turkey country analyst at GlobalSource Partners, point out that the currency’s share of Turkish foreign trade is miniscule compared with the 71% that is denominated in dollars and 21% in euros.

“Despite high inflation, the [Turkish president Recep Tayyip] Erdogan administration’s strategy continues to widen the current account deficit, which is likely to hit $30 billion next month,” says Sonmez. “The amount of external debt to be paid over the next 12 months exceeds $175 billion.”

At the end of April, Erdogan told reporters that inflation would begin to fall after May. Earlier this month, treasury and finance minister Nureddin Nebati suggested that the government would introduce inflation-linked bonds for individual investors and predicted “a significant decrease in inflation in the coming period with the normalization of commodity prices, the stability in the exchange rate and the additional steps we will take.”

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