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Turkey’s Currency Crisis Raises Cost of Living, Threatens Financial System


A sharp slide in the value of Turkey’s currency, the lira, is hitting the country’s economy.


Francisco Seco/Associated Press

ISTANBUL–Turkey’s currency crisis is driving up the cost of food, medicine and other essentials for average Turks, and poses a threat to the country’s banks and large companies if the lira’s slide isn’t arrested, economists said.

The steep drop in the lira, which has lost more than a third of its value to the dollar in eight months, is shaking a Turkish society that had long prided itself as an ascendant economy that rivaled its European neighbors. Ordinary people are now struggling with a decline in their living conditions, with rampant inflation putting pressure on wages and eating into savings.

“My life is completely changed,” said Kemal Ince, an Istanbul shopkeeper who hails from Rize, the conservative Black Sea stronghold of President

Recep Tayyip Erdogan.

Mr. Ince says that he is ashamed to have to increase the prices of coffee, olives and cheese, and that even as he charges his customers more, he still feels squeezed.

“I don’t have the luxury of spending money on anything,” he said.

Soaring inflation and the depreciating lira have been triggered by interest-rate cuts demanded by Mr. Erdogan as part of an unconventional economic strategy that he argues will encourage growth. Generally, central banks raise interest rates when inflation is high to cool off demand. However, Turkey’s central bank cut interest rates for the third time in as many months Thursday despite inflation reaching nearly 20% in October.

Turkey’s current crisis is the worst the country has faced since 2018, when the lira also dropped precipitously amid a crisis in relations with the U.S. Worries over potential loan defaults–and stress on banks–were so high in 2018, the country’s banking regulator allowed lenders to extend loan maturities and facilitate debt restructuring.

Turkey’s major banks and companies–many laden with big foreign-currency loans–now face longer-term risks of instability if Mr. Erdogan continues down the path of cutting interest rates further, economists and businesspeople here said.

“These kind of imbalances might end up with a run on banks,” said Omer Gencal, a former executive at several Turkish and international banks and now an official with an opposition party. “The current situation isn’t sustainable.”

Turkish banks face the problem that companies carry a large foreign-currency debt. The more the lira drops, the harder it is for borrowers to pay down their loans in U.S. dollars or euros.

According to the Turkish central bank, nonfinancial companies had about $160 billion in foreign-exchange assets and $280 billion in liabilities as of August. The gap has narrowed since 2018, though it is still wide. Banks’ lending in foreign currency ranged from 24% to 45% of their total loans in the first half of the year, according to Fitch Ratings.

While banks have kept their nonperforming loans in check, including through the pandemic, Fitch warned in a report last month that “risks remain high given exposure to the volatile Turkish operating environment, risky segments and sectors, significant foreign-currency lending and the high lira interest-rate environment.”

Turkish President Recep Tayyip Erdogan.


Burhan Ozbilici/Associated Press

Jason Tuvey,

senior emerging-markets economist at Capital Economics, however, said the greatest threat for Turkish banks is their ability to rollover their external debts if investors get increasingly spooked.

Short-term external debt of banks stood at $84 billion, or close to 10% of the country’s gross domestic product. Mr. Tuvey said April next year will be a key month for banks, given some of that debt will be due then. Mr. Tuvey said that back in 2018 banks were able to draw down their foreign-exchange assets held at the central bank to meet external debt repayments.

“The upshot is that banks would be able to muddle through for a short period as in 2018, but they may struggle to cope if access to international capital markets were to be restricted for a considerable amount of time,” Mr. Tuvey said.

Turkey’s large companies may be able to cope with the crisis for the moment because of foreign-currency reserves that he said might be even larger than official figures show, an ability to pass costs onto consumers, and government assistance including loans, according to Hakan Kara, a former chief economist at the central bank.

“The corporate sector is more resilient than it looks on paper,” said Mr. Kara.

The crisis has fallen hardest on ordinary Turks, many of whom are swapping their earnings into foreign currency or looking for ways to leave the country.

“I have no confidence left in the Turkish lira because we cannot see what lies ahead for us in this country anymore,” said a woman in her 60s who walked into an exchange office in Istanbul to change 50,000 lira into dollars. The woman, who owns a pharmacy, asked to have her name withheld because of fear of government reprisal.

The government imposed a new rule this week requiring customers to present identification cards any time they exchange more than $100 worth of currency.

Mr. Erdogan doesn’t appear likely to change course, despite the political risks of soaring inflation. He has intensified his calls for low interest rates and the central bank this week used language that suggested it would cut rates again in December.

He favors low interest rates as part of a strategy intended to create economic growth. Mr. Erdogan has ruled Turkey for nearly two decades as both prime minister and president, winning elections in part by vastly expanding the country’s economy.

Now Mr. Erdogan’s time in power is at risk of coming to an end as the plummeting lira erodes the standard of living for millions of Turks, driving away potential voters.

“Erdogan runs everything. He doesn’t allow either the finance minister, or the central bank governor, or anyone else to do their jobs,” said the owner of an exchange office in Istanbul.

Write to Jared Malsin at and Patricia Kowsmann at

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