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Turkey has declared an economic witch hunt; what will be the consequences?

The government does not know what the valid reason for the devaluation is. However, the root cause is inflation, which, according to PPP theory, requires balancing foreign trade flows through the exchange rate and the current account deficit of the balance of payments. And populist deposit rescue programs may add a third reason – the Turkish lira’s public debt deficit fell by 5% on Thursday, extending a four-day decline.

The significant increase last week was due to massive interventions and measures by the government, which struggled to convince depositors to ignore volatility, despite lingering concerns about rising inflation and unorthodox rate cuts. As a result, the currency has lost as much as 20% in four trading sessions. It followed an epic rally of more than 50% over the previous five days, which by a new government scheme to protect deposits in lira from depreciation compared to hard currencies.

He was causing the currency crisis: inflation and soft PREP. The rapidly developing currency crisis by a series of aggressive interest rate cuts began in September. President Tayyip Erdogan sought his “new economic program” to support exports and lending.

Economists and opposition lawmakers called the policy easing reckless, given that inflation has exceeded 21% and is expected to exceed 30% this month and in the coming months, primarily due to the sharp depreciation of the lira. However, Finance Minister Noureddine Nebati, whom Erdogan appointed earlier this month, said late on Wednesday that record volatility was not a concern. He also said that last week there were no government interventions to sell dollars and strengthen the lira, despite data showing that the central bank’s foreign exchange reserves fell, which, according to bankers, indicates the support of the market from the state.

According to official data, the intervention cost the central bank at least $ 5.5 billion in foreign currency assets a few days before releasing the deposit rescue plan. However, economists say that they have not seen an increase in deposits in the lira in official data. “The explanation that the rapid growth of the exchange rate (lira) last week occurred due to an increase in deposits in lira is not confirmed by the figures. These were currency interventions,” said Erik Meyerson, senior economist at Swedish bank Handelsbanken. According to the scheme unveiled by Erdogan, the Treasury or the central bank will cover the difference between deposit rates and the fallen lira exchange rate.

Turkey’s central bank has said it will prioritize measures to encourage depositors to use lira deposits in 2022 and, in addition, take steps to make the lira more attractive than a foreign currency. On Wednesday, the bank said in a document outlining monetary and monetary policy for the coming year.

Policymakers will also stick to the medium-term inflation target of 5% – even if consumer price growth exceeds 20% – while reneging on the promise of tighter monetary policy made by former Central Bank governor Nasi Agbal a year ago. Inflation is the root of all the troubles of the lira. Many economists warn that if the lira continues to depreciate, this scheme can provoke inflation and increase the state’s budget burden.

Nebati said on CNN Turk that there were 59.8 billion liras ($4.60 billion) in protected deposits as of Wednesday. For November, official annual inflation data exceeded 20%, and economists expect it to reach 30% in December. The will likely be published data on January 3. The central bank of Turkey stated that it would allow determining the exchange rate based on supply and demand factors. However, investors and economists say they have lost confidence in the central bank’s ability to achieve these goals due to political pressure and perceived lack of independence. Therefore, high inflation will be the main obstacle to keeping the lira in the hands of the Turks.

Turks have sought to keep savings in dollars, euros, and gold instead of the lira, and economists do not expect this trend to change following the new deposit protection policy. “Today, we see that the lira is depreciating again, and I don’t see any real arguments in favor of stabilizing the lira’s exchange rate,” Mr. Meyersson said. Witch Hunt, the lira’s fall, came days after the government stepped up a decades-long crackdown on dissent about the economy in public discourse.

Turkey’s Finance and Treasury Minister Noureddin Nebati has called on citizens to file lawsuits against individuals over their comments on the lira after authorities questioned some of them on suspicion of trying to manipulate Turkey’s exchange rate. Nebati said that the government “can’t do anything” to solve the financial problems of people who invested in foreign currency and suffered losses when the lira recovered by 73% on December 20, when the authorities announced a series of controversial measures that put it on a more stable footing.

Nebati, speaking in an interview with CNN Turk on Wednesday, said that Turkey could not be held responsible for the financial decisions of individuals and advised its citizens to sue the people who predicted the devaluation of the lira. Nebati categorically rejected illegal foreign currency sales accusations to stop the lira’s loss against the dollar and insisted that state-owned banks not participate in the foreign exchange market. “I declare this as the Minister of Finance and Treasury, there was no interference on the night of December 20,” Nebati said, admitting that he liked text messages saying that the lira was strengthening. “It was amazing, and I had the most beautiful night of my life.” However, Turkey’s banking supervisory authority has filed criminal charges against more than a dozen individuals, including two former central bank governors, for their comments on the currency.

In a tweet on Monday, Turkey’s ban and Ig regulator said it is filing criminal lawsuits against former central bank officials, economists, and journalists for publishing online messages that the regulator claims manipulated currency movements. The former head of the central bank, Durmus Yilmaz, who appears on the list, said he learned about the complaint on social networks. However, he has not yet received an official notification and does not know why the regulatory body has opened a criminal case against him. Rusdu Saracoglu, another former central bank governor, named on the list, expressed confusion, writing on Twitter: “I left the central bank in 1993. I have been retired since 1999.

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