Erdogan's Turkey spends beyond its means as Lira loses value

PreisidentErdoganhad waged his fights abroad betting on the Turkish economy. He hoped the Turkish economy will be able to foot the bills of his battles but it cannot.

The Turkish economy was considered a regional success story, however, problems have been piling up. Turkey's central bank used borrowed money to save the Lira.

Now, it has a deficit, that could run into billions of dollars.

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The Turkish economy has been unravelling. In November, Turkey's inflation rate soared to a little more than 14 per cent which is a 15-month high and it hurts the people of Turkey directly.

Consumer prices have risen by 2.3 per cent. It's limiting what people can afford to buy as day-to-day expenses have gone up with food, beverages and transport becoming costlier.

Turkey's currency, the Lira has tanked since the beginning of this year. The Lira has lost nearly 30 per cent of its value against the dollar and more than 30 per cent against the Euro.

According to reports, Turkey is spending far beyond its means. The pandemic has widened the cracks in the Turkish economy. It has exposed a $25 billion hole that the Erdogan government was trying to hide.

In March, Turkey's foreign currency reserves were propped up by short term borrowing as the Lira began to slide. Turkey's central bank spent billions of dollars to stop the bleeding which were borrowed from domestic banks.

By August, Turkey owed more foreign currency to banks than what it had in its coffers. The central bank owed $54 billion to Turkey's banks. According to an estimate, the Turkish central bank ended up spending around $65 billion by August more than what it had borrowed.

The central bank ended up $25 billion short and by September end the situation worsened. Turkey's foreign reserves are said to be in "deep negative territory". One estimates put the deficit at $50 billion.

Turkey only has Erdogan and his family to blame for the crisis. The international press has pointed fingers at Berat Albayrak, the president's son-in-law who suddenly resigned this year from the post of Turkey's finance minister. Albayrak is said to have been the brain behind the plan to rescue the Lira by pumping more money - a plan that cost Turkey $140 billion in two years.

Now, difficult choices lie ahead for Erdogan as a steep decline in the Lira could potentially bankrupt Turkish banks. The other option is a steep interest rate hike. It will stabilise the lira but throw the Turkish economy into a deeper recession.

The Turkish president finds himself stuck between a rock and a hard place.