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How the Turkish lira entered free fall

The European Parliament’s vote to suspend Turkey’s membership talks is the latest move to worsen the rapid decline of the Turkish lira's foreign exchange rates.
Turkey's central bank governor Murat Cetinkaya speaks during a news conference in Istanbul, Turkey April 26, 2016. REUTERS/Murad Sezer - RTX2C6AI
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In its heyday, years before the 2009 global financial crisis as well as in the ensuing years, when the United States and Europe pursued liquidity expansion to battle the crisis, Turkey’s ruling Justice and Development Party (AKP) enjoyed abundant inflows of foreign capital, with an annual average of nearly $38 billion for the past 14 years.

Those resources, however, were used mostly toward domestic demand, financing consumer loans and sectors that bring in no foreign exchange gains, such as construction. As a result, Turkey’s current account deficit became a chronic problem and its external debt stock, 40% of which is short-term, swelled to nearly 60% of the gross domestic product. In addition, inflation and unemployment in those years got stuck at 7%-8% and around 10%, respectively, while investments ground to a halt. Thanks to the global fall in energy prices, the current account deficit — $35 billion annually on average — did not widen, but did not recede either.

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