Emergency measures taken by Erdogan allow the recovery of the Turkish...

                The Turkish lira rebounded on Tuesday, December 21, 2021, following the emergency measures announced by President Recep Tayyip Erdogan, after a wave of panic on Monday caused fluctuations that reached thirty points in its price.                
                  
After a chaotic trading session, Erdogan surprised the markets and the political opposition by announcing his decision to link the value of some bank deposits in Turkish lira to the price of the dollar. 

Economists and many Turks are still trying to understand how this new exchange mechanism works, especially how the government intends to fund it, but it has certainly reflected positively on the lira, which until Monday lost 45% of its value against the dollar since the first of November.

After the lira lost an additional 10% of its value, a few hours after Erdogan appeared on television after the weekly cabinet meeting, it recorded a 20% increase against the dollar in deliberations.

“The Erdogan administration ultimately cares about the exchange rate and has avoided imposing capital controls,” economist Timothy Ash of BlueBay Asset Management wrote in a note Monday. “Erdogan has proven that he believes in markets, not interest rates,” he wrote in a note Monday.

Indirect increase in interest rates

The Turkish president remains convinced, contrary to other popular economic theories, that high interest rates encourage inflation rather than contain it as it slows economic activity. In recent months, he pressured the Central Bank to reduce its interest rate four times, despite the continued rise in inflation, which reached 21% in November compared to the same month last year.

This means that the Turks, who were depositing money in the national currency in their bank accounts, were losing its value every month, and economists warned that the Turkish banking system would be paralyzed if people rushed to withdraw their money.

The aim of Erdogan’s measures, described by the former adviser to the Turkish treasury, Mahvi Egelmaz, as an “indirect increase in interest rates,” is to protect the value of lira balances from exchange rate fluctuations, and it guarantees citizens that the government will compensate for any decline in the value of bank deposits in lira relative to the dollar through periodic payments .

“If the exchange rate rises by 40% and the interest rate by 14%, the difference of 26 points will be paid as compensation,” Egelms explained.

This policy aims to reassure Turks when they deposit money in the national currency in banks. However, this mechanism will not enter into force until three months after the funds are deposited, the Ministry of Finance explained in a statement on Monday.

The new measures contributed to reassuring the Turks, without completely succeeding in stabilizing the market, so fluctuations in the lira continued, and after it rose by 22% on Tuesday morning, it returned and lost all its gains before rising again by 6% in the afternoon.

Yet many economists question whether this new policy is sustainable.

Speaking to reporters, former Economy Minister Ali Babacan pointed out that “guaranteeing deposits will increase public spending,” explaining that “the public treasury will pay its payments thanks to taxes. It is the dollarization of the country’s economy.”

Economists have also questioned the ability of this decision to actually protect Turks from the rapid increase in the cost of living. Tim Ash said, “It remains a bad policy,” adding that “this program probably made it possible to buy time and avoid a temporary collapse in the banking sector, but nothing was done to combat inflation.”