The American dollar, which gained value and increased to above 6 Turkish liras in parity after the Electoral Council’s decision to re-run the mayoral election in Istanbul, slumped to below 6 liras again yesterday.
Of course, we need to understand the possible reasons of the recent volatility in dollar-lira parity in order to respond to this question.
Don’t let my phrase ‘the recent volatility‘ here mistaken you. We all know that our national currency generally loses value against most of other currencies. Within the last year, our currency suffered a freefall. [The dollar had an exchange rate of 4.2 in May last year; now, however, the rate is around 6 liras, and the exchange rate depreciation is around 50 percent.]
Almost everything is closely related to economy. Displaying an adverse image of ‘one-man rule’, deterioration in the fields of rule of law as well as rights and freedoms, drifting from one side to another in foreign policy, all these affect inevitably monetary value of our currency. Because, there is a strong mutual interdependency between democracy and markets.
Okay, but why did our currency suddenly rise in value while it was in a steady fall?
If we are to be realistic…
People who give credit to some apologetic explanations such as ‘conspiracies of a mastermind‘ and ‘operations of evil foreign powers to destroy our economy‘ lack any commonsense response to my question above. Such people are expected to come up with more reasonable and realistic explanations about this new trend of our currency.
Some argue that a series of interventions of the Turkish Central Bank helped the lira gain value to a certain extent. Even though I would sincerely like to believe this very much, this is the view I find least likely.
Because, markets have long since considered decisions and announcements of the Central Bank out of touch with reality.
What is left then are two possibilities.
The first is some signs implying the possibility of change in foreign policy. A Turkish NASA employee with American citizenship, jailed pending trial due to a FETÖ case has just been released from prison unexpectedly. The same development is expected to take place for the three imprisoned employees from the US Consulate in Istanbul.
More importantly, it seems that the delivery of the S-400 air defense missile system, of which purchase has already been commissioned will probably be delayed despite some claims from the government officials such as “It is too late to repeal the agreement, the production process is over, training of our expert staff continues, and the system will be on its way to Turkey soon.“
What have been announced recently indicate that withdrawal the agreement or delaying the delivery of the system are now in the range of possibility.
Because this signifies a détente in Turkey’s troubled relations with the USA, the market pressure on the Turkish lira may have been taken off to some degree.
Demand for the American dollar undermines value of the lira. Due to the problems in foreign policy, people exchange their liras into foreign currencies as they anticipate further value decrease in the Turkish currency, and this tendency affects the market to the detriment of the Turkish lira.
The successive threatening announcements from Washington directed at the Turkish government, the decision of the US Congress to impose sanctions on Turkey in case of delivery of the S-400, and the announcement of the Pentagon which states exclusion of Turkey from the F-35 military craft production program while two F-35 aircrafts are still pending for delivery were seriously mystifying many of us.
It seems now that the two countries have reached some common ground in negotiations in the backroom.
Russia has given the impression that it really respects Turkey’s sensibilities on security issues in Syria, but Moscow lately deviates from that path and this causes some second-thoughts in Ankara, this may have an effect in this, too. Syrian-Russian joint forces have been staging military attacks for days on targets in the Syrian city of Idlib despite the fact that Idlib had been declared as a ‘de-escalation zone’ as a result of Turkey’s pressure in the trilateral summits among Russia, Turkey and Iran, known as the ‘Astana process’.
Perhaps, the Russians have opened the floodgates for these military operations as they have an inkling of Turkey and the USA may break the ice between themselves.
Judicial reform package
Another possible reason for the value increase of the lira against the US dollar is the ‘judicial reform package’ that was announced by President Tayyip Erdoğan yesterday.
The package aims to deal with the harsh criticism of Europeans at the problematic judicial exercises in Turkey. The European Union had reflected its firm critical position on this matter in its recent progress report related to Turkey.
While announcing this reform package yesterday, President Erdoğan referred to some European institutions, the Venice Commission in particular.
The package includes some adjustments that aim to put an end to some common complaints such as long detention periods and remands. The judiciary detains people in prisons for long periods even before let them know why they are being accused of; the package promises to change this. Some considerable improvements in freedom of expression are envisaged. While our country is infamous of the ban on the access to Wikipedia for a long time, the reform package also promises smooth Internet access free from such bans and limitations.
According to experts in the financial sector, the promises of improvements in justice system, jurisdiction and rule of law, and announcements of these promises by President Erdoğan have showed their positive impact immediately, thus, the Turkish lira has gained value in markets.
Which one is the case? The recent positive outlook in relations between the USA and Turkey, or the positive reaction of markets in regard to the judicial reform package has led to the value increase of lira? Or both of these?
I think you are aware that recent steps aim to better relations with the USA, the promises of judicial reforms aim to improve our relations with the EU.
Of course, we can’t overlook the role of the fact that these developments occurring while time is running out for the critical mayoral election in Istanbul.
Markets have responded positively to these recent developments. Let us see how residents of Istanbul will react to them on the day of election.
[Translated by Bernar Kutluğ from the the article appeared in this site’s Turkish section on May 31, 2019]