Learn about the main reasons for the collapse of the Turkish lira - New Gersy

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Learn about the main reasons for the collapse of the Turkish lira






Hot events in the political arena, especially with the growing tension between Turkey and the United States, with the recent threat of economic sanctions on Ankara, exacerbated the Turkish lira crisis, which exceeded the 6-lira against the dollar, on Friday (August 10th).




A Turkish delegation that met with US officials recently failed to resolve a diplomatic row between the two countries.

The US Treasury Department has imposed sanctions on Turkey's justice and interior ministers after threats from US President Donald Trump to impose "major sanctions" on Turkey if the American pastor Andrew Branson, who was under house arrest after 21 months in prison, On charges of supporting the Fatahullah Gulen group, which Ankara accuses of being behind the attempted coup on July 15, 2016.

It has become clear that the political dimension is the main driver of the events, and that some international parties are trying to limit Turkey's regional and international role, especially after the status restored by Ankara on the international arena;





In light of the deterioration of the exchange rate of the lira and the high inflation rates, the economic issue is the main issue for the Turkish citizen, the Arab residents, as well as the investors and businessmen, because it directly affects their income and plays a major role in determining their consumer behavior and future plans.



Despite the end of the presidential elections and the announcement by the Turkish president of his program and economic plan for the coming period, the Turkish lira crisis continues and worsens, especially in light of the widening gap in views regarding the efficiency of the economic policies adopted by the Turkish government, The instability of exchange rates and the increase in the volume of public debt.

This raises many questions: What are the main reasons behind this continuous deterioration? Does the Turkish economy suffer in recent times as a result of wrong economic policies, or is the problem fabricated and has political dimensions? What solutions are available to the Turkish government?

According to data from the Central Bank of Turkey, the Turkish lira has lost more than 30% of its value since the beginning of this year, and the index of economic confidence fell by 4.9% by the end of May 2018, compared to April of the same year, in light of continued high inflation rates predicted by the Central Bank To reach 13.4% by the end of 2018.




1-Internal economic reasons
There is no doubt that the timing of the diplomatic crisis between the United States and Turkey has contributed significantly to the deterioration of the Turkish lira exchange rate in recent days, especially the threats of sanctions against Turkey.


Learn about the main reasons for the collapse of the Turkish lira

But it is not logical to consider the political reasons as the main driver of the instability of the Turkish lira, while ignoring some of the difficulties and problems in the structure of the Turkish economy, which played a major role in the deterioration of the exchange rate of the lira.

The main economic reasons are the current account deficit and public debt.





2-Current Account Deficit
The continued current account deficit is one of the most important dilemmas faced by the Turkish government. This index is linked to the volume of remittances received from the country.

This deficit means that the volume of remittances out of Turkey is greater than the volume of remittances entering Turkey.

The recent adoption by the Turkish Government of its economic policy in recent years of short-term flows (rapid entry and exit from the market) has undoubtedly been a viable one.


Learn about the main reasons for the collapse of the Turkish lira

Despite the role of these flows in moving the market and achieving economic growth, relying on them and making them the main driver of the market is a high risk because of their sensitivity to the turmoil and crises, both internally and externally, as evidenced by the recent crisis with the United States, And monetary and trade policy changes at the international level.

This has made the Turkish government's area of ​​intervention somewhat limited in maintaining the stability of economic indicators, especially the exchange rate.

In light of the easing of restrictions on the movement of these funds, any concern or concern of investors means a collective escape of those funds; which negatively affects the exchange rate, which has been exploited by rating agencies and international institutions by pumping them to negative reports, although they rely on real numbers, And negative indicators suffered by the Turkish economy.

But the aim of those reports is to punish the Turkish President for his attempt not to comply with the policies of the International Fund, and his political positions at the regional and international levels.

According to reports by the Central Bank of Turkey (CBK), as of the end of May 2018, the current account deficit totaled $ 57.6 billion, compared with $ 36.2 billion in May 2017. Financial assets were sold at $ 5.19 billion, and the trade deficit In the first half of 2017, to nearly $ 70 billion by the end of the first half of 2018, due to the high cost of imports, especially as Turkey has a shortage of natural resources and energy; and because it is a country whose economy is heavily based on foreign trade.

This means that the value of the trade balance deficit increases. The higher the volume of production and export, the higher the import bill of raw materials used in manufacturing and export.

Due to energy imports alone, the deficit in the Turkish trade balance reached almost 10% of GDP.

Thus, the current account deficit worsened and the FDI inflow recorded a decrease of $ 1.57 billion in the first half of 2018 compared to the same period last year.





3-Public debt
The high level of external debt on the public and private sectors, which were mentioned in official statistics, contributed to the exacerbation of the exchange rate crisis.

According to the Turkish treasury budget, the public debt reached 453.2 billion dollars by the end of 2017.

The total debt of the private sector, including $ 210.9 billion, about half of this debt to non-financial companies, 35% of this debt denominated in dollars (Turkish companies obliged to sell the pound and buy the dollar), which means that the continued decline of the Turkish lira means an increase in the volume of debt and burdens on Turkish companies, with the complexity of the process of access to foreign financing, especially in light of high interest rates also.

For example, corporate debt, which was estimated at $ 210.9 billion at 843.6 billion lira at the price of 4, has now become a trillion and 265 billion lira. Corporate debt rose by 421 billion liras in a short period .

The uncertainty of economic policies, especially monetary policy, has also contributed to the creation of a climate of pessimism that has negatively affected the exchange rate.

This is reflected in the report of the Central Bank of Turkey on the expectations of high inflation, and its announcement to keep interest rates unchanged, in a decision contrary to expectations of markets that were expecting a significant increase to curb inflation, and directed citizens and companies resident in Turkey to buy the dollar in an unprecedented manner.

As the internal demand for the dollar amounted to more than 2.5 billion dollars in days, as a result of the prevailing mistrust, as well as slow government procedures related to the economic file, which gave a feeling of citizens and investors that there is no clear vision of the government in the economic file.

And the Turkish economy. As an emerging economy, its sensitivity to economic changes at the regional and international levels is high, and the degree of sensitivity of the indicators varies depending on the nature of those events.

As a result, the existing trade war has increased Turkish lira problems, especially in the context of deteriorating relations with the United States. This means that a large part of Turkish exports may lose access to US markets without customs duties, In addition to the impact of the commercial war on the decisions of the expansion of Asian companies.

Therefore, political stability and the closure of foreign fronts is a necessity for the stability of the Turkish economy.

Turkey can get out of the impasse by returning to the International Monetary Fund, with difficulty, especially with the positions of the Turkish President opposed to the policies of the Fund, or making political concessions to contain this deterioration, which is excluded by observers because it is related to the sovereignty and prestige of Turkey, Its allies, who also have economic differences with Washington, such as China and Russia.




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