Question

Why Turkey exhibits a high inflation after the depreciation rate in Turkish currency against US DOLLAR $? please explain and give real examples.

Answer 1

With the depreciation in the Turkish Lira against the US Dollar, imports became costlier. This along with international market prices pushed the country into a downward economic spiral.

With the US Dollar becoming more costly, it was difficult to get hands on the dollar for Payments. This also signified that the Lira was losing it's value. After regular slides against the dollar, the state pipeline operator raised the price of natural gas for use in power plants and residential use by almost 50%. The energy regulation authority followed suit. When gas prices shoot up, prices of other commodities follow.

Along with this, Turkey is infamous for not having an independent central bank. The independent central bank in various countries can raise interest rates and control inflation as and when necessary. But even with rising inflation, the Turkish Central Bank was not allowed to raise interest rate so that growth and expansion can be fuelled. This low interest rate along with a slide in the US dollar making imports costlier and the cascading effect on domestic production and services led to a constant rise in the price level of Turkey.

Thus after the constant depreciation of the Turkish currency against the US dollar, inflation in the country spiralled out of control because there was no regulation in place to control the inflation.

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