Turkish President Recep Tayyip Erdogan announced this week that the Government will compensate citizens with savings in lira Turks the losses suffered by the rapid devaluation of the lira against foreign currencies, an announcement that caused a spectacular revaluation of the currency.
In a televised speech after the government cabinet meeting, Erdogan assured that he will offer a new financial vehicle that it would “alleviate” the concerns of citizens who have been buying foreign currency for fear that their lira savings will fade. The Turkish president assured that this mechanism will compensate for possible losses due to the fall of the local currency, although the details were rather scarce, the lira has reacted with increases that have reached more than 50% in two days.
“From now on, our citizens will not need to change their deposits from Turkish liras to foreign currency for fear that the exchange rate will be weaker,” assured the Turkish president.
A plan with gaps
However, the president only exposed some broad strokes of the plan without going into details. Textually assured that “we will use a new tool. If the earnings (from interest) in a savings account in lira are higher than the drop in the lira, people will keep them. If the opposite occurs, the difference will be paid directly to the citizen. “, assured the president.
“In this way, no citizen has the need to change their savings into foreign currency saying that the change is higher (than the increase in money in the bank),” Erdogan concluded. However, the president did not talk about where that money will come from that will compensate savers, nor when they will receive it or under what means of payment or form.
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Erdogan also assured that the government will introduce a measure to help exporters and at the same time the government contribution to private retirement plans will increase. The lira strengthened 24% on Monday against the dollar after Erdogan’s announcement, increases that continue this Tuesday. Still, the Turkish currency falls 44% on the year against the dollar.
Although official figures show that annual inflation has accelerated to 21%, while the Central Bank has cut interest rates by 500 basis points to 14%, well below inflation itself. The bank is acting under pressure from Erdogan, who has proclaimed himself an enemy of high interest rates and has removed three governors over monetary policy disagreements.
Erdogan has long argued that high interest rates cause inflation, a theory that contradicts mainstream and mainstream economic thinking in recent decades. Erdogan has vowed to keep rates low and prioritize growth, exports and employment.
“With the fall in interest rates we will see how in a few months the inflation rate will begin to fall,” Erdogan assured. However, for now, the weakened lira is driving up prices, making imports, fuel and everyday goods more expensive. Millions of Turks struggle to buy food and other basic goods.
Interest rate policy
On Sunday, Erdogan vowed to keep interest rates low, citing Islamic teachings against usury, saying: “Expect nothing more from me.”
Also this Sunday he promised to reduce inflation to 4% as his government has done in the past. Erdogan has also squarely rejected rumors about the possibility of implementing capital controls, expressing a commitment to free market rules.
Later, the Turkish leader attacked the TUSIAD conglomerate, a group of Turkey’s leading companies, which has long called on the government to return to “generally accepted economic rules” to restore financial stability to the country. For now, Erdogan and Turkey will continue to swim against the tide and give economic theory a pulse.
