Erdogan’s moves revive ailing lira

ANKARA — Turkey’s lira gained more steam and was up 15 percent on Tuesday, extending its historic recovery from record lows, after President Recep Tayyip Erdogan unveiled a plan to guarantee local currency deposits against market fluctuations.

The lira hit an all-time low of 18.36 against the US dollar on Monday, but rebounded to a high of 11.09 on Tuesday morning. It was fetching 13.75 in early trading on Tuesday.

In a late Monday speech, Erdogan said the series of steps will ease burden from a currency crash over the last few weeks and encourage Turks to hold lira savings instead of dollars.

He said the country will compensate lira deposit holders for their loss of wealth if the lira falls in value.

“From now on, our citizens won’t need to switch their deposits from Turkish lira to foreign currency, fearing that the exchange rate will be higher,” he said.

The extraordinary measure is aimed at boosting confidence among Turks about their currency after many flocked to foreign currencies and gold to hold on to their savings amid massive fluctuations and soaring consumer prices.

Erdogan also mentioned that the government will implement instruments to ensure that lira assets are not used in a way to create fresh foreign exchange demand.

Exporting enterprises that are having trouble presenting prices owing to fluctuating foreign exchange rates will be granted advance exchange rates by the central bank.

Other measures include reducing the withholding tax on corporate dividend distributions to 10 percent, increasing the government’s contribution to the private pension scheme from 25 to 30 percent, and cutting the withholding tax on government domestic debt securities to zero.

Before the announcement, the lira was down more than 10 percent to 18.36 against the dollar. It later shot back to as far as 12.71 — its biggest intraday rally on record — to end the day up 25 percent.

About $1 billion was sold in the markets after his announcement, said the head of the Turkish Banks Association. According to calculations of three bankers, around $1 billion to $1.5 billion in savings were converted to lira on Monday night.

Higher prices

The lira has plunged to record lows this year over fears of an inflationary spiral brought on by Erdogan’s push for monetary easing, losing about 40 percent of its value in the past month alone. At its low, it was down some 60 percent.

The weakened lira was driving prices higher, making imports, fuel and everyday goods more expensive. Many people in the country of more than 84 million are struggling to buy food and other basic needs.

The rapid rebound was triggered by the deposit guarantee promise that Erdogan said would dissuade Turks from converting savings to hard currencies.

“We are presenting a new financial alternative to citizens who want to alleviate their concerns stemming from the rise in exchange rates when they evaluate their savings,” said Erdogan after a Cabinet meeting, while repeating his defense of a low-rate policy that initially caused the lira’s slide.

“With reduced interest rates, we will see inflation go down in a couple of months.”

Though the government has called the lira’s recovery a major win, economists have called his economic program based on low interest rates reckless and said inflation — currently above 21 percent — might blow through 30 percent next year, Reuters reported.

The Associated Press reported that the government has long argued that high interest rates cause inflation, contrary to conventional economic thinking.

Some economists said the new measures are effectively veiled rate hikes that may not ultimately stem the selling pressure, while straining the backstopping Treasury.

“It can have dangerous consequences,” Refet Gurkaynak, head of the economics department at Bilkent University in Ankara, told Reuters.

DILARA SENKAYA / REUTERS Prices in jewelry shops, such as this one in Istanbul on Monday, attract attention among Turks with their large holdings of gold.