Explained: 5 reasons why the Turkish lira is falling

Over the past one week, the lira slipped over 20 percent against the US dollar. The currency, however, has been falling for some time now with and is down 80 percent against the US dollar for this calendar. Owing to the rapid depreciation, lira has become one of the weakest currency in the world this year.

Also read — Opinion | Is Turkey leading global markets to the next crisis?

What are the factors contributing to the lira's fall?

Huge dollar debts

Turkey's economy is grappling with high levels of debt in the private sector and significant foreign funding in the banking system. According to a New York Times report, Turkey relies on foreign-currency debt more than any other major emerging market. Corporate, financial and other foreign currency debt, mostly dollar-denominated, represents about 70 percent of Turkey’s economy.

According to data from the Bank for International Settlements (BIS), Turkish borrowers owe Spanish banks $83.3 billion, French banks $38.4 billion; Italian banks $17 billion; Japanese banks $14 billion; UK banks $19.2 billion; and the United States about $18 billion.

Also read — Turkish crisis hits rupee; Rs 70/$ mark now in sight

Rising inflation

Besides, the country's inflation rose to an annual rate of 15.9 percent in July – more than five times the average rate for wealthy nations. According to a Guardian report, there are also fears of a crash in the construction sector, which has been growing at a scorching pace for the last many years. If that happens, banks that have lend money to these companies will be in trouble.

Low interest rates

To rein in inflation, the Turkish central bank has to raise rates. But President Recep Tayyip Erdogan insists on keeping interest rates low as he believes that the high-interest rate is “the mother and father of all evil”. Thus, the Turkish central bank has been reluctant to increase rates despite criticism from financial experts.

Lack of sufficient forex reserves

A key problem is that the country does not have enough foreign exchange reserves to prevent the slide. Turkey has foreign reserves of $130 billion with a short-term foreign debt of $180 billion. Nearly 70 percent of its overall debt of $460 billion is foreign.

Increasing tensions with the US

On August 10, US President Donald Trump doubled steel and aluminum tariffs on Turkey, aggravating the problems in the Turkish economy.

Trump's announcement came as Turkey's battered currency hit new record lows against the US dollar and euro on Friday. Investors are worried that Turkey’s relations with the US may be strained for a while.

Also read — Watch out! Turkish lira could potentially delay Indian growth recovery

How are the Turkish authorities responding to the currency crisis?

On Monday, Turkey vowed to take measures to calm market fears sparked by the plunge in the lira's value as its president accused Washington of spearheading an "underhand plot" against his country.

"Our institutions will take necessary action from Monday in order to relieve the markets," Turkey's Finance Minister Berat Albayrak said, adding that the plan would center on "the state of our banks and the small and medium-sized enterprises" most affected by the lira's plunge.

Will the crisis in Turkey crisis affect India's growth?

India is less vulnerable relative to other emerging markets (EMs) in terms of external debt and current account deficit. But if the crisis continues, it could hurt India.

According to broking firm Edelweiss, India’s exports would slow down if the global situation deteriorates. Also, domestic liquidity could dry up as the RBI will have to reduce the flow of rupee in the system to strengthen the currency. In the first quarter of this fiscal, the RBI spent roughly $15 billion to support the rupee. This, in turn, could push up interest rates and hurt companies’ margins.