The Turkish economy has entered a new area of turmoil. On Thursday, October 21, the Financial Action Task Force (FATF) added the country to its list of nations lagging behind in the fight against money laundering and terrorist financing. This decision could have serious consequences for an economy, which is already struggling to attract foreign investment. Being on the “gray” list means that the banking sector in the country in question is unreliable, which puts investors at risk of illicit financing.
The announcement, Thursday, October 21, by the Central Bank (BCT) of a further 200 basis point cut in its key rate, from 18% to 16%, and the plunge of the Turkish currency to historically low levels (it traded on Friday at 9.61 pounds – about 0.86 euros – for one dollar, against 1.86 ten years earlier), is not likely to reassure either. Since the start of the year, the Turkish lira has lost almost 20% of its value. Moreover, foreign direct investment fell to its lowest level, 5.7 billion dollars (about 4.8 billion euros) in 2020, against 19 billion dollars in 2007, when the Turkish economy was at its zenith.
Promote exports
This rate cut was wanted by President Recep Tayyip Erdogan, who, since 2018, claims full control over the BCT, trampling on the autonomy and credibility of the institution. Supporting growth through credit is its main priority. Contrary to a widely shared economic consensus, he claims that low rates make it possible to curb inflation, which, in Turkey, is one of the highest in the world, 19.6% in September, almost four times more than the medium-term objective set by the BCT.
The latest rate cut, decided in September, had already resulted in a fall of more than 6% of the Turkish currency. In mid-October, President Erdogan, upset by the continued decline of the currency – despite the measures taken to try to support it – sacked two deputy governors of the Central Bank as well as an official of the monetary committee.
If a weak currency is likely to promote exports and therefore benefit the conservative entrepreneurs who form the backbone of Erdogan’s Justice and Development Party (AKP), this also has a negative impact, as Turkey is very dependent on materials. the raw materials it imports – gas, oil, coal.
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