International Monetary and Financial Environments
Turkey has experienced significant economic growth since the current President Recep Tayyip Erdogan took overpower. There was massive investment in the economy that fueled economic growth. The turkey was one of the preferred destinations for multinationals to set up their companies. However, since the economic crisis in Turkey, the error that underlaid the leadership of Erdogan have been exposed that have left the economically vulnerable. As a result of the crisis, turkey’s lira has plummeted, and the cost of borrowing soared significantly. Economist term the growth in turkey as V-shaped where there is a sharp recession and a slow growth that started to pick up in 2019. The crisis has been fueled by the conflict between Turkey and the USA (Gauthier-Villars, & Sindreu, 2018).
One of the main reason why turkey found herself in that state is because of the cheap credit that the companies in the country borrowed. This borrowing started in 2008 affect the great economic depression that left many economies suffering (Akcay & Güngen, 2019). the central banks in the united states offered cheap credit to allow the economy to pick k again. This created an opportunity for companies in Turkey to borrow money in USA dollars and euros (Hakura & Hakura, 2020). This results in remarkable economic growth for turkey. Don't use plagiarised sources.Get your custom essay just from $11/page
The borrowing bonanza was also catapulted. The problem was also exacerbated by the leadership of Erdogan, who does not think that interest should be used to regulate the growth of the economy (Elliott, 2018). Erdogan’s near monopolization of the policymaking has been seen as one of the factors that have led to the crisis (Hakura & Hakura, 2020). The central bank governor in turkey did not agree with Erdogan’s perception on excessive reduction of the interest rate to stimulate economic growth. H
One of the significant impacts of the Turkish economy is the loss of jobs. According to the TurkStat, there was a sharp increase in employment that reached 14.7 per cent in the first quarter of 2019. The rate of unemployment increased significantly were in 2019, 4.4 million people were unemployed in the country as a result of the economic, monetary financial and devaluation of the Turkish currency (AlBawaba, 2020). This resulted in a special l of effects such as the crisis in the real’s estate sector, decline in foreign investment. Most of the company have been forced to close down due to hard economic times and the rising cost of external debts that they were supposed to pay (Goodman, 2019). the rate of employment decreased by 225,000 people as compared to the number of people who had been employed in 2018. The employment in the construction sector also declined to by 119,000 as compared to 2018 (AlBawaba, 2020).
The private consumption in the economy which accounted for almost of the country’s GDP when negative. The consumer confidence index which is indicated by financial and economic situation expectations and the probability of saving decreased (Whittall & Minczeski, 2018). As a result, the contribution of the agricultural sections dropped by 0.3 per cent, and that of the service industry also plummeted by 0.5 per cent (AlBawaba, 2020). The sectors that were hardest hit were construction and manufacturing that contracted by 8.7 and 6.4 per cent respectively.
The economic crisis also resulted in a fall in the level of investor confidence in the economy which was resulted from the microeconomic imbalances that contributed to net capital outflow in the economy in 2018 (Obstfeld & Taylor, 2017). The portfolio invests which had been used to finance the current account deficit reduced from 24.4 billion inflow in 2017 to 3,9 billion outflow in 2018. Furthermore, the capital outflow surpassed the capital inflow especially in august after the onset of the crisis with the capital flight reaching a record 14.8 billion and the trend was only mitigated by the sharp increase in the in rates (Aliriza, 2020).
Implication On the Global Economy
Turkey trades closely with Europe and has borrowed significantly from European banks. However, the economy of turkey is just 1 per cent of the global economy, and therefore it may not have a significant effect, especially in Europe. From history, when the economic crisis faces turkey, European exports are able to export to other markets, therefore, reducing the impact of the crisis in Europe. Even though there are possibilities that the banks that have advanced turkey money may be affected, there are adequate measures in Europe that are championed by the European central bank that will caution the countries that are heavily exposed (Eliot 2018). even though the developed world may have got a significant impact of the crisis, the emerging markets are likely to been affected by the crisis.
Fiscal and Monetary Policies Taken
One of the strategies that turkey undertook to contain runaway inflation was to increase interest rates in the economy. This was intending to help in stabilizing the lira was losing b significantly to the dollar. By increasing the interest rates, there would be less borrowing which would reduce the circulation of money in the economy and this help in containing the crisis. This amidst calls from investors to move away from growth that was fueled by credit and adopt fiscal disciplines (Whittall & Minczeski, 2018).
Another measure was to reduce the –endi9ng by the government. The economy had been field by huge investments that had littered the leadership of Erdogan. This result in huge government expenditure which increased the circulation of money in the economy. Thus by reducing the government investment, the government would be able to reduce expenditure.; additionally, by having a budget deficit, the government would need to borrow, including internally, that would help to mop the excess cash in the economy.
Problems That Still Exists
The first problem that still exists is that foreign investment to spur economic growth will be marginal. The government has restricted the lira swap. This will have a negative implication in the economy by further reducing their willingness to invest in the economy (Hakura, 2020).
There is still a challenge in the economy because the Turkish government introduced indirect domestic capital control where it is limiting the commercial transactions to lira as opposed to using euros or dollars. This is meant to reduce the foreign currency demands due to the massive external debt obligation that faces the country (Hakura, 2020). However, this may not be sustainable in the long run.
The commercial banks have also been involved in futile efforts to reduce the volatility of the lira by transitioning from free float to managed float, which has not succeeded. For the last two years, the central banks have used over 37 billion, which is not sustainable in the currency markets (Hakura, 2020).
Conclusion
Turkey has been one of the economies that had performed exemplary well in the last decade. However, the growth was driven by debts that was borrowed in euros and dollars. Furthermore, the attitude of Erdogan on interest rates propelled growth for a while. Economic growth propelled by foreign debts resulted in overheating of the economy, which has resulted in the current crisis. The crisis has resulted in massive job loss due to companies being closed. The country has taken a few measures, such as reducing government expenditure and raising interest rates. However, the country still faces a challenge in that most of the measures being taken are not held in the long-term.
References
Akcay, Ü., & Güngen, A. R. (2019). The making of Turkey’s 2018-2019 economic crisis (No. 120/2019). Working Paper. https://www.ipe-berlin.org/fileadmin/institut-ipe/Dokumente/Working_Papers/ipe_working_paper_120.pdf
AlBawaba . (2020, March 22). Turkey: Unemployment Rates Leapfrog As Economic Crisis Intensifies. Retrieved March 23, 2020, from https://www.albawaba.com/business/turkey-unemployment-rates-leapfrog-economic-crisis-intensifies-1346106
Aliriza, B. (2020, February 28). The Turkish Economic Slowdown in 2018. Retrieved March 23, 2020, from https://www.csis.org/analysis/turkish-economic-slowdown-2018
Elliott, L. (2018, August 13). How serious is Turkey’s lira crisis, and what are the implications? Retrieved March 23, 2020, from https://www.theguardian.com/world/2018/aug/13/how-serious-is-turkeys-lira-crisis-and-what-are-the-implications
Gauthier-Villars, D., & Sindreu, J. (2018, August 11). Turkish Crisis Rattles Global Markets Amid Escalating Spat With the U.S. Retrieved March 23, 2020, from https://www.wsj.com/articles/turkish-crisis-rattles-currency-markets-dollar-hits-one-year-high-1533883798
Goodman, P. S. (2019, July 8). Turkey’s Long, Painful Economic Crisis Grinds On. Retrieved March 23, 2020, from https://www.nytimes.com/2019/07/08/business/turkey-economy-crisis.html
Hakura, F., & Hakura, F. (2020, February 18). A Credit-fuelled Economic Recovery Stores Up Trouble for Turkey. Retrieved March 23, 2020, from https://www.chathamhouse.org/expert/comment/credit-fuelled-economic-recovery-stores-trouble-turkey#
Koc, C., & Ersoy, E. (2018, December 9). How Turkey Created a Debt Crisis. Retrieved March 23, 2020, from https://www.bloomberg.com/news/features/2018-12-09/how-turkey-created-a-debt-crisis
Obstfeld, M., & Taylor, A. M. (2017). International monetary relations: Taking finance seriously. Journal of Economic Perspectives, 31(3), 3-28. https://www.nber.org/papers/w23440.pdf
Whittall, C., & Minczeski, P. (2018, August 13). Turkey on the Economic Brink, Explained in a Dozen Charts. Retrieved March 23, 2020, from https://www.wsj.com/articles/turkey-on-the-economic-brink-explained-in-a-dozen-charts-1533889110
YenNee_Lee. (2018, August 13). What went wrong for Turkey? Its economy is ‘in the midst of a perfect storm’. Retrieved March 23, 2020, from https://www.cnbc.com/2018/08/13/turkey-crisis-economy-faces-weak-lira-inflation-debt-and-tariffs.html