The long and bitter fall: an account of events that shook the Turkish economy during September–December 2021

Abstract

The problems that the Turkish economy faced during the September–December 2021 period, which attracted a great deal of attention at home and abroad, was in essence a currency crisis with far-reaching implications for almost all aspects of the political economy. As the Central Bank reduced its policy rate from 19 percent in September to 14 percent in December through successive monthly announcements, the Turkish Lira (TL) experienced an unprecedentedly sharp depreciation—should one say collapse?—from 8.30 TL to the US dollar (US$) at the beginning of September to 8.86, 9.55, and 13.36, at the beginning of the successive months, and continued to fall daily to 17.50 TL on 20 December with no sign of a slowdown in sight.1 The government attempted to halt this fall by selling a total of around US $6 billion of Central Bank reserves during the 1–17 December period, but to no avail. After the announcement by the government of a new scheme—exchange rate protected time deposits (ERPTD)—on the evening of 20 December, there was a sharp fall in the dollar/TL parity to 13.05 TL the following day which has stabilized at around 13.50 TL since then. The new scheme was aimed at reducing the demand for foreign currency by increasing the attractiveness of the Lira. It was intended to protect TL time depositors with three-month, six-month, and one-year terms against the depreciation of the Lira by guaranteeing to compensate them fully (in TL) for depreciation over and above their interest earnings. Whether it was this scheme alone that facilitated this sharp fall remains a matter of conjecture. The most plausible explanation offered so far is that on that day, the Central Bank and public sector banks together sold a total of around US$7 billion dollars. It seems that swap agreements with a number of Gulf