All sectors of the economy in the north are expected to be affected by the collapse of the Turkish Lira, with the commerce and real estate sector expected to be hit the most. However, the tourism sector is expected to benefit from the situation, as the dr

The Euro-TRY exchange rate has plummeted in five years from 2.32 in 2013 to an all-time low on Monday of almost TRY 5 per Euro (4.99), while the inflation rate reached a staggering 14.68% in 2017, as announced by the Turkish Cypriot planning office.

Odul Muhtaroglu, the head of the public planning organisation announced the 2017 figures during a press conference last week, adding that the upside scenario for 2018 projects an inflation of 10.2%, the same as the 2016 figure. Muhtaroglu directly linked the increase in inflation to the crumbling Turkish Lira and the trade deficit.

Mustafa Besim, a Turkish Cypriot economist and professor at the Eastern Mediterranean University in Famagusta, told the Financial Mirror that the economy in the north is dependent on imports which are booked in foreign currency, mainly the EUR, even those from Turkey. That, coupled with the collapse of the Turkish Lira, caused Turkish Cypriots to lose a significant portion of their purchasing power, which has a retrospect effect on orders placed by businesses, Besim said.

He pointed out that the crashing TRY, and the everwidening trade gap have inflated prices of goods in the north, contributing to the increase of the cost of living. Besim said that according to official figures, the Turkish Cypriot community exported goods worth USD 105.6 mln, while importing goods worth USD 1.6 bln.

The EMU economist explained that all sectors of the economy in the north are expected to be affected by the collapse of the Turkish Lira, with the commerce and real estate sector expected to be hit the most. Besim added, however, that the tourism sector is expected to benefit from the situation, as the drop of the TRY is expected to draw tourists. “We also expect to see an increase of spending in the north from people and tourists arriving from the south of the island,” he said.

Already, Greek Cypriots are reported to be looking for bargains with the cheaper Turkish currency in retail petrol sales and in restaurants.

Asked if the drop of the Turkish lira is affecting the operation of the Turkish Cypriot administration, Besim said that the situation has had a positive impact on state revenues.

“The administration’s costs have increased due to the the inflation adjustments applied every six months on wages in the public sector. On the other hand, income is also set to increase as a result of the rise in the value of imports and taxes applied, which are in foreign currency”, he said, adding that the economy as a whole has taken a beating.

Turkish Cypriot consumers are being hit severely as they see their purchasing power go up in smoke, despite inflationbased adjustments made to the salaries of public servants and the minimum wage every six months. The minimum gross wage in the north was the equivalent of 592 euros in 2013, that has dropped to 436 in 2018.

Sener Elcil, head of the Turkish Cypriot Teachers’ Union (KTOS) told the Financial Mirror that the community is in dire straits. He said that as everything is linked to a foreign currency, Turkish Cypriots are paying a high price for almost every item in the market.

“If you buy a watermelon from the market, you will have to pay for the fluctuations of the Turkish Lira as they are mainly imported from Turkey”, Elcil said, adding that this is just a small example of how the crashing lira is affecting their lives.

“Many services are also indexed to a foreign currency. Rents are also indexed to a foreign currency, while a number of private schools’ fees are in euros,” he explained.

Elcil said that as if this was not enough, if Turkish Cypriots wish to take out a loan, they are forced to do so in a foreign currency as Turkish banks offer very high interest rates for loans in TRY. “Loans in GBP and EUR carry an interest rate of 5-6%, while loans in TRY carry an interest rate between 13% and 15%, depending on the institution,” he explained.

“Our salaries are paid out in TRY and with how things stand today, it is almost impossible for someone on a private sector worker’s or even a teacher’s wage to pay back a loan taken out a few years ago, as our purchasing power has been wiped out,” added Elcil.

The head of KTOS also expressed the union’s concern over the “minimum wage which has been set below the ‘hunger line’, according to an index used in the north to calculate the cost of living, which is a benchmark farther below the internationally-accepted ‘poverty line’.

Echoing the same concerns, Arslan Bicakli, president of the Turkish Cypriot Workers union (Turk-Sen) said that the minimum net wage of TRY 1,901 (EUR 381) cannot cover the needs of a four-member family.

“Even if a family of four try to make do with just eating simits (Turkish bagels) and tea, the money would still not be enough”, adding that there is no way a family of four on just one minimum wage could cover the needs for rent, water and electricity bills, and buy food. “It is not possible for people to continue living with this wage,” added Bicakli.

He added that according to a survey conducted by the union, the minimum wage in the north should be around TRY 4,200 (EUR 842).

Meanwhile, further reactions have been stirred up within the Turkish Cypriot community, when members of the assembly saw their salaries rise to TRY 12,500 (EUR 2,500), after a TRY 900 (EUR 180) inflation adjustment at the beginning of the year.

The discussion on what can be done to mend the situation has spread throughout the community with various opinions being voiced.

Asked what could be done, Mustafa Besim said that, “there are thoughts of fixing an exchange rate for imports for a period of time. This way, all proceedings like import tax and transfer acts in the real estate sector could be made with a fixed exchange rate. However, as Turkish Cypriots do not have the ability to form their own monetary policy, there is not much that could be done towards solving the problem”.

The issue whether Turkish Cypriots should switch to using a foreign currency, namely the euro, is also debated. Arguments in favour support that this could be a move that could help stabilise costs on imports and tame the inflation rate.

However, Turkish Cypriot economists appear to be sceptical over the matter, while there are those who believe that although feasible it will not go a long way in resolving the community’s financial difficulties.

Contributing to the discussion, leading economist Okan Veli Safakli, said that adopting the euro is not possible as in order to do so, one must meet the Maastricht criteria, which among other things, demand that the inflation rate be below 1.5% on an annual basis. He added that even if this were possible, nothing would change.

“Furthermore, switching to the euro is not going to change the import-export balances, and in this sense we would have to resort to Turkey for euros which will cost more”, he explained adding that a switch to the Euro would only make things harder to receive money from Turkey. “A switch to the Euro could only do damage”.

Erdal Gurvay, another Turkish Cypriot economist, echoing the same concerns, said that 25% of the community’s budget is covered by Turkey, plus various grants and loans.

Gurvay said that the source of the problem is the Cyprus problem and any measures taken will only be palliative.

“Our problem stems from the fact that we are not a recognised state” he concluded.