{"id":28084,"title":"Turkish economy enters a vicious circle – Inflation and Devaluation","link":"https:\/\/bst-europe.eu\/de\/globalization\/turkish-economy-enters-a-vicious-circle-inflation-and-devaluation\/","date":"13. Mai 2021","date_unix":1620910225,"date_modified_unix":1684774689,"date_iso":"2021-05-13T12:50:25+00:00","content":"

For quite some time, Turkey’s debt<\/strong> has been rising, its currency has been losing value, and inflation has been picking up. When I wrote about the Turkish economy in Q3 2017<\/a>,<\/em> the figures suggested the possibility of a boom. <\/em><\/p>\n

But I also identified some challenges, including fighting inflation and restoring investor confidence<\/strong>. But like most prognosticators, I did not predict the COVID-19 pandemic, which now threatens to send the country over the edge into economic crisis.<\/em><\/p>\n

Turkish lira loses value rapidly<\/strong><\/h2>\n

The value of the Turkish currency has fallen sharply against the euro since 2018 and now is half of what it was at the end of 2017. Compared to the zloty, the currency of Poland<\/strong>, another emerging and developing European economy with a much more stable currency, the lira appears to be in a steady devaluation slope.<\/p>\n

\"turkish<\/p>\n

Several factors have led to the devaluation of the lira<\/strong>. Demand for the currency is lower than its supply due to a variety of factors: the low competitiveness of many sectors and the resulting current account deficit, political turbulence, the Turkish central bank’s lack of independence, and high inflation, to name a few.<\/p>\n

Turkish economy: Devaluation drives up inflation<\/strong><\/h2>\n

A devaluation<\/strong> of the domestic currency, in turn, makes all imported goods more expensive. Consumers have to spend more on foreign consumer products. For Turkish companies, imported inputs become more expensive, too.<\/p>\n

This is particularly problematic when it comes to raw materials and intermediate products for which there are no domestic substitutes. The higher-priced inputs increase the cost of production<\/strong>. Turkish consumers have to pay for this. Over the past three years, the annual average inflation rate in Turkey<\/a> has been over 12 percent.<\/p>\n

Such a sharp rise in prices<\/strong> is particularly problematic for low-income households. For them, it will become increasingly difficult to pay for urgently needed basic necessities.<\/p>\n

\"turkish<\/p>\n

This high inflation<\/strong> rate exacerbates the devaluation trend: If inflation causes Turkish companies‘ production costs to rise, they can no longer sell their products abroad. If foreign countries demand fewer Turkish products, demand for the Turkish lira falls. If demand for the Turkish currency declines, the lira continues to lose value, and prices in Turkey rise, contributing to a vicious circle<\/strong> of inflation and currency devaluation.<\/p>\n

Current account deficits drive up external debt<\/strong><\/h2>\n

High and rising inflation also has an impact on a country’s foreign economic development:<\/p>\n