Public mistrust in Erdogan's government

The Turkish lira, in a fresh downward spiral since the abrupt sacking of the central bank governor in March, plunged to more than 8.5 against the dollar, its lowest level in six months.

Recent losses in the lira have brought the focus back to Turkey’s shrinking foreign exchange reserves, as well as its central bank, which is hesitant to tighten policy even as inflation surges.

In a bid to prop up the lira, the central bank had hiked its policy rate by 200 basis points to 19% in March, but only a couple of days later, President Recep Tayyip Erdogan removed central bank governor Naci Agbal, who was given the post less than five months before amid government pledges of economic reform.

The central bank’s new governor, Sahap Kavcioglu, kept the rates unchanged in April and May. The slump of the lira, coupled with rising inflation, leaves little room for rate cuts as the government would like.

On the other hand, Ankara’s waning economic credibility has already soured the appetite of foreigners, and Turkey could hardly rely on foreign investments to finance its current account deficit as it did in the past.

Turkey’s need for external funds is expected to grow in the second half of the year. Critical talks with the United States and the European Union in June, coupled with an ongoing US case against a Turkish public bank for helping Iran evade sanctions, are seen as major risks.

Moreover, the mistrust in Erdogan’s government has led local savers to turn to hard currencies to protect their savings against the depreciation of the lira and inflation. 57.4% of individual deposits in Turkey are in foreign exchange, amounting to $159 billion.

Sustaining tight monetary policies is the strongest weapon in managing such setbacks, but that hardly suits Erdogan’s political calculations.