Explainer | What led to Turkey’s currency crisis?

Turkish President Recep Tayyip Erdogan’s unconventional economic policies have been blamed for the country’s currency crisis.

Turkey’s official currency, the lira, has been in a free fall recently, losing about a quarter of its value against the U.S. dollar in November. Since the beginning of the year, the currency has lost almost half of its value. The lira has in fact been depreciating over an even longer time. It took two liras to buy a U.S. dollar in 2014. Today, it takes more than 13 liras to buy a U.S. dollar. Turkish President Recep Tayyip Erdogan’s unconventional economic policies have been blamed for the country’s currency crisis.

The value of any currency or any goods for that matter depends on, among other things, how scarce it is. For example, if there is an unlimited supply of liras in the market but only a limited supply of food, each lira will buy you very little food. The same logic applies when we compare currencies. The supply of Turkish liras in the market has been rising rapidly when compared to relatively harder currencies like the U.S. dollar. According to World Bank data, Turkey’s broad money supply rose by about three and a half times between 2014 and 2020 while broad money supply in the U.S. rose by around 50% during the same period. Not surprisingly, this has caused the value of the Turkish lira to drop against the U.S. dollar.