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Ankara's efforts to help banks could backfire

The Turkish government's moves to shield public banks against economic woes could discredit its monetary policy and further scare off foreign investors.
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Ankara is increasingly focusing on managing its economic crisis, which despite its slow pace is now being acknowledged by the authorities. Political tensions with the United States abruptly plunged the Turkish lira to record lows of more than seven against the dollar in August, overheating the economic climate. The relative easing of bilateral tensions since then have helped the lira regain ground, with the price of the greenback decreasing to about 5.2 liras in late November. The decrease, however, was the result also of economic contraction, which led to imports falling to $16 billion in October, a $5 billion decrease from four months earlier. The contracting economy means a lower demand for foreign exchange. Increased interest rates on the Turkish lira have also been instrumental, encouraging deposit holders to shift from foreign exchange to liras.

Yet the relative decrease in foreign exchange prices does not mean the crisis is over. On Dec. 4, the lira began sliding anew amid investor concerns over early loosening in monetary policy. Also, interest rates on the lira have significantly risen over the past several months and inflation remains over 20%, while the unemployment rate has exceeded 11% and is likely to increase further. Industrial production is on the decline, with figures from the construction sector indicating a significant downtick in what used to be the driving force of Turkey’s economic growth. 

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