Turkey takes measures to lift ailing currency

Turkey ruled yesterday that property sales, rental contracts and leasing transactions must be made in lira from now on, halting the use of foreign currencies for such deals in a fresh step to support the ailing local currency.

All business deals inside the country should be conducted in lira, President Tayyip Erdogan said, adding that nobody apart from exporters and importers should cross paths with foreign currency.

“We are solving the issue of rent in foreign currency, which concerns a lot of our vendors, once and for all,” Erdogan told a meeting of a traders’ confederation. “Every business in this country needs to be priced, discussed and carried out with our own currency,” he said, adding that further moves to support the lira were on the way.

But economists and industry participants doubted the move would have a permanent positive impact, saying it hampered predictability and was likely to bring additional burdens for firms with foreign currency debt.

Real estate sales and rental deals in foreign currency are common in Turkey, particularly in the retail sector.

“Around 70 percent of the rental contracts in shopping malls are in foreign currency,” Hulusi Belgu, chairman of the council of shopping centers said. “There is tremendous uncertainty right now. What further regulation will follow after this decision is important.”

Turkey’s shopping mall industry has over US$15 billion of debt which firms could struggle to repay if they are unable to generate foreign currency revenues, Belgu said, adding that such decisions may spook foreign investors who account for about US$17 billion of a total US$58 billion invested in shopping malls.

In a decision published yesterday in the Official Gazette, the government said any contracts previously made in foreign currency but which are currently in effect must be converted into lira within 30 days.

The decision also covers contracts for business and services. Contracts cannot be agreed in foreign currency or indexed to a foreign currency.

While many analysts criticize what they say are unconventional measures to support the lira, Turkey’s central bank raised its benchmark rate by a hefty 625 basis points yesterday, the biggest such increase in Erdogan’s 15-year rule, boosting the lira and possibly easing investor concern over his influence on monetary policy.

Upside risk to inflation

The bank’s Monetary Policy Committee raised the one-week repo rate to 24 percent, meaning it has now increased interest rates by 11.25 percentage points since late April in an attempt to put a floor under the tumbling lira. The central bank said in its statement that there was still an upside risk to Turkey’s inflation outlook from what it called a deterioration in pricing behavior, despite weaker domestic demand conditions.

“Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability,” it said.

Its decision came despite Erdogan repeating his opposition to high interest rates earlier in the day, saying high inflation was a result of the central bank’s wrong steps.

The lira has lost some 40 percent of its value against the dollar this year over concerns about Erdogan’s influence on monetary policy and a diplomatic spat between Turkey and the United States.