Turkish currency lira fell by nearly 16 percent on Monday (March 22) following President Recep Tayyip Erdogan’s decision to sack the central bank governor Naci Agbal last weekend. The move came as a shock to many since the ousted governor had helped the lira recover from historic lows. Erdogan has now replaced Agbal with Sahap Kavcioglu, a former banker and former lawmaker of the ruling Justice and Development Party.

That Agbal had been raising interest rates to fight inflation could well be the reason behind his sacking as Kavcioglu is seen as a critic of the policy just like Erdogan is. This was the third instance in the past two years that a central bank governor has been unceremoniously removed from his position.

According to a BBC report, Agbal’s removal shocked both local and foreign investors, who were impressed with Turkey central bank’s recent monetary policy.

To allay apprehensions, Finance Minister Lutfi Elvan said the country would continue with the free market rules, which then helped the lira recover and stand about 8 percent lower against the US dollar.

Agbal, who was appointed less than five months ago, had increased the interest rates by 2 percentage points, double of what economists expected. Following his sacking, the new governor said, in a statement, that the bank would focus on a permanent solution to lower inflation, which has been in double digits over the past four years.

The currency and debt crisis of 2018

While inflation has been in double digits for nearly four years as the new governor has underlined, Turkish currency, too, has seen the free fall before. The most dangerous of the crises came in 2018 when lira’s value fell dramatically, inflation peaked, the borrowing costs skyrocketed and so did loan defaults. Interestingly, Erdogan’s strong opposition to high rates and unorthodox interest policy was said to be one of the primary reasons, along with rising authoritarianism, for the crisis.

Pandemic impact

Roughly two years after the currency and debt crisis, lira’s plunge continued throughout the last year further abetted by the COVID-19 pandemic. In fact, a report in the Middle East Eye says that the currency’s value eroded by 30 percent last year alone following the difficult circumstances thrown by the pandemic.

However, lira’s fall has been observed for nearly a decade. And not long before the start of the decade in which the lira plunged, Turkey’s economy was said to be one of the strongest among the free-market economies.

How did they reach here?

In January 2012, lira valued at 1.88 against the US dollar. This, over the past nine years, has increased to 7.81 now. The previous two instances when the value of lira fell significantly against the dollar was in May 2018 when Erdogan instructed the central bank to report to him. Back then, it valued 4.73 against the US dollar.

Just three months later, the then US President Donald Trump imposed sanctions on Turkey over detained pastor Andrew Brunson and caused another crisis and fall in the value of lira to a staggering 6.80.

It stabilised for a while in December 2018, staying at 5.2 and at 5.7 when the opposition party won the mayoral elections in June 2019. But the currency once again fell dramatically to 6.45 against the dollar when the pandemic hit Turkey in March last year.

In August 2020, low tourist arrivals, followed by depleted foreign reserves, had triggered another currency crisis with lira valuing 7.35 against the US dollar.

(Edited by : Aditi Gautam)