Turkish Government Scrambles to Save the Lira
Crypto Regulation, Gold Exchange, Lira Bonds, Tax Increases
The period over the last 4 months or so has been a roller coaster ride for the Turkish currency — the lira (TRY). On December 20th, amidst the panic of the currency rapidly losing value, President Erdoğan unveiled a magic trick by telling the Turkish people that their savings deposits in lira would be guaranteed. As a result, the TRY responded with ~40% increase in value against the US dollar (USD) — going from ~18 TRY/USD to ~11 TRY/USD almost instantaneously. But those of us who live in reality understand that this will be short-lived.
The only way the government can protect savings of lira from losing value is to stop devaluing (printing) the currency to finance its operations. But the Turkish government has no plans to stop this mode of operation. So, now what? In a scramble to save the currency without actually stopping the devaluation, the Turkish government is chasing all sorts of plans to grab some value.
The Turkish Parliament met last week to discuss the country's new “cryptocurrency law.” Apparently, the common opinion out of that meeting was that “the law must be enacted as soon as possible.” Of course, details of this law are hard to find at this time, but one thing is clear: a tax on crypto will be a main part of it. Ruling Justice and Development Party (AK Party) Group Deputy Chairperson, Mustafa Elitaş, told the press after the meeting that,
“Cryptocurrency representatives said that there should be a tax for this system.”
The growing acceptance of decentralized digital money has challenged the government and it’s currency. In April 2021, the Central Bank of the Republic of Turkey (CBRT) said it was banning the use of crypto for payments, although it remains legal to hold. Bank governor, Şahap Kavcıoğlu, has reiterated that “the bank does not intend to ban cryptocurrencies.” They recognize that there is a market volume of $2 billion-$3 billion with up to 14 million investors. All the government wants at this time is their cut.
Gold Collection Program
Göksel Aşan, the head of the Presidential Finance Office, has suggested that a plan is in the works to collect part of an estimated 5,000 tons of gold and gold jewelry held by the Turkish people. The government would exchange the physical gold for “gold certificates.” The government estimates that the amount of gold out there is worth ~$280 billion USD. So of course, they want their cut.
But I don’t believe the Turkish people are going to fall for this scam. After all, more than half of locals' savings is in foreign currencies and gold due to a loss of confidence in the lira after many years of constant depreciation. I do not believe they trust that which has already failed them. I hope they will hold onto their gold for their sakes.
Turkey is considering “inflation-protected” lira bonds to help save the currency. Details of these bonds are unknown at this time. Aşan has simply hinted that bonds are in the works,
“I do not think that it will be another bank deposit instrument, which would mean competing with the new forex-indexed lira deposits,”
But these “instruments” are likely to simply be paid back in depreciated currency. There is no magic trick that will defy reality.
Nothing says, “we understand you are struggling,” better than tax hikes, am I right? That’s sarcasm, of course, but apparently the Turkish government has increased various taxes right into the new year. As the Turkish people struggle with the rising cost of living, they are slapped with more costs to live.
Toll taxes and motor vehicle taxes will be raised considerably. They are even increasing the penalty for not using a seat belt from 144 to 196 lira and penalties for running a red light and talking on a phone while driving from 314 to 427 lira. The prices for passports, ID cards and notary papers have also increased.
Things are not looking good for the lira. A recent sharp rise in electricity prices are only adding more strain to an economy facing soaring price inflation. The Energy Market Regulatory Authority said electricity prices were raised around 50% for lower-demand households for 2022, while they were increased by more than 100% for high-demand commercial users.
As of now, the TRY is at ~13 TRY/USD, climbing its way back to the high of ~18 TRY/USD. How long can the government hold off the climb? We shall wait and see.