Much to President Recep Tayyip Erdogan’s chagrin, economic woes have been a dominant issue ahead of Turkey’s June 24 presidential and parliamentary polls, with both economic actors and ordinary Turks stuck between a plummeting Turkish lira and rising interest rates.
To stop the slump of the lira, the central bank has twice raised interest rates since May, when the price of the dollar shot up to a historic high of more than 4.9 liras. Despite the two rate hikes — 4.5 percentage points in total — the dollar’s price remains above 4.7 liras, keeping the central bank under pressure for further action.
It is still unclear how effective the hikes have been in curbing the flight from the Turkish lira, but Erdogan continues to urge citizens who keep hard-currency savings “under the pillow” to return to the lira. Amid the currency’s dramatic depreciation — about 20% since the beginning of the year — many Turks have turned to hard currency to preserve the value of their savings.
During a May 26 election rally in Erzurum, Erdogan appealed to citizens “who have dollars and euros under the pillow” to “put their money in the local currency.” True to style, he referred to a foreign ploy to undermine Turkey’s economy and added, “We will thwart this game together. … We will not abandon the free market [economy] and, very soon, we will deflate the foreign exchange bubble.”
It was not Erdogan’s first appeal to that effect. In December 2016, when the dollar had risen to 3.5 liras after having been 2.8 liras three months earlier, he again spoke of thwarting financial ploys and urged citizens “who keep dollars under the pillow” to convert their savings to liras or gold.
In another appeal a month later, he said, “There is nothing to fear. … I call on everyone to not collect foreign exchange under the pillow and convert it to Turkish liras. If that money is converted to Turkish liras, the markets, I believe, will be very much relieved.”
Turks have always kept hard currency “under the pillow,” but there are significant signs that the problem has now worsened. Despite the rush for hard currency, reflected clearly in the skyrocketing foreign exchange prices, there is no corresponding increase in foreign exchange deposits in banks, which raises the question of where that money has gone.
According to the central bank’s weekly banking statistics, foreign exchange deposits held by local residents totaled some $154 billion at the end of 2017. Despite the rush for hard currency since April, the deposits not only did not increase but were about $1 billion down as of June 1. What to make of this trend?
The first explanation that comes to mind is that those who flee the Turkish lira for foreign exchange shy away from depositing their hard currency in banks, preferring to keep it in their own safes at home or business places. This explains also Erdogan’s repeated calls that “under-the-pillow” hard currency should be funneled into the financial system.
Yet the president’s appeals seem to have borne little fruit. If Turks had heeded his calls, this would have resulted in a drop in foreign exchange prices or at least in an increase in hard-currency deposits in banks. But small and big savings holders continue to keep their money outside the financial system, which reflects waning confidence in the country’s economic prospects and Ankara’s management of the economy.
The confidence crisis is reflected also in official confidence indices. Based on monthly surveys by the Turkish Statistical Institute and the central bank, confidence indices have been on the decline since January. The economic index, which combines the mood of consumers and the real sector, stood at 93.5 in May, down from 105 in January. The consumer confidence index, meanwhile, fell by 2 points to 70 in the same period.
The confidence crisis among local actors has been exacerbated by rumors circulating via the grapevine and social media that the government could resort to drastic measures to rein in the hard currency upheaval, including restrictions on foreign exchange deposits in banks and capital movements. Crisis-hit countries have occasionally opted for such measures, and, in Turkey, opposition quarters in particular believe that Erdogan’s heavy-handed government is well capable of such restrictions. As a result, talk of people withdrawing their hard currency from banks has spread like wildfire.
A 2017 report on wasted resources in Turkey, commissioned by the Customs and Trade Ministry, includes findings on the savings Turks keep “under the pillow.” According to the report, based on interviews with 1,650 people in 26 provinces across the country, Turks keep 20% of their lira and hard-currency savings at home. Some 36% of saving holders say they keep their money in bank deposits, and another 35% say they invest their savings in gold. Nearly 60% of hard-currency savings and 77% of gold savings are kept at home, according to the survey.
The report recommends, “Individuals should be equipped with knowledge about … how to utilize their savings within the financial system. To lure under-the-pillow savings into the financial system, people should be offered lucrative advantages such as interest-rate opportunities and those advantages should be promoted, while emphasizing the risks of keeping savings under the pillow.”
A certain amount of hard currency, meanwhile, ends up abroad, including in tax havens, either through legal or illegal means. Legitimate transfers include the creation of companies, other forms of investments and property purchases overseas. Such capital movements have contributed to the loss of hard currency as well, while increasing financial needs have pushed up the price of foreign exchange, stoking inflation and interest rates on the funds needed to bridge the gaps. Global headwinds affecting emerging economies such as Turkey and the country’s mounting risk premium have further added to the cost.
In sum, the crisis of confidence is the biggest problem of the Turkish economy today. The predominant political culture, which draws on polarizing society, has played an important role in spawning and aggravating this crisis. Hence, a new, unifying political climate could help restore confidence and spur the return of funds into the financial system, thus having a positive impact on the economy as well.