August 27, 2018

TURKEY: LIRA (Ⱡ) CURRENCY CRISIS - Learning from Malaysian Experience

27 August 2018

Learning from Malaysian Experience

World attention is currently focused on Turkey as the country is shocked by the worst currency crisis in history.

How did the crisis begin?

The crisis began in March 2018 when Donald Trump imposed economic sanctions on Turkey by raising 25% import tax on iron and steel and 10% on imported aluminum. On August 10, 2018 Trump further increased the import tax to 50% on iron and steel and 20% on aluminum.

Turkey is the world's 8th largest producer of steel and the value of exports to the US amounted to $ 1.1 billion in 2017. Turkey is also the 6th largest steel exporter to America and accounts for 5.6% of total US steel imports (Source: Trading Economics).

It is estimated that the increase in import tax will reduce the export earnings of Turkey to America by 56% (Source: CNBC).

Why Trump imposes an economic sanction on Turkey?

The cause is a combination of factors. However, the key factor is the Trump dispute with Turkey since 2016 over the arrest of Andrew Brunson, an American pastor involved in espionage and attempt to overthrow the Turkish government in October 2016. Brunson faces a 35-year prison sentence in Turkey (Source BBC News, April 16 2018). Trump wants Brunson to be released.

US pastor Andrew Brunson is at the centre of a row between Washington and Ankara that has caused a Turkish currency crash and and global economic jitters. (Photo: AFP)
What is the impact of Trump's action on Turkey?

The immediate impact is the loss of investor confidence in the future of the financial and economic system of Turkey following the economic sanctions imposed by Trump.

The investor confidence crisis has led to massive withdrawals of foreign capital from the financial markets and the Turkish stock market. They are shifting to investing in stocks and stronger currencies, especially the USD.

Friday, October 10, 2018, Foto: CNBC
What is the effect of losing investors' confidence in the value of Lira (Ⱡ) currency?

The immediate impact was the depreciation of the Lira (Ⱡ) currency, which plunged to the lowest level in the Foreign Exchange Market (FOREX).

Lira (Ⱡ) has dropped more than 40% against the US dollar since early 2008. It hit the lowest Ⱡ6.82 for every 1USD on August 13, 2018 compared to Ⱡ3.60 on October 16, 2017 (see Figure 1).

What impact has the fall of Lira (Ⱡ) on the Turkish economy?

In economic analysis, the expected effect of the depreciation of the currency on the economy of a country is summarized as follows:

(i) The increase in the prices of imported goods (ii) the increase in inflation due to the rise in prices of imported goods (ii) increase in external debt as external borrowing to finance development programs is by means of major foreign currencies (iii) increase in deficit as payments on imported goods exceed export earnings, and (iv) a shrinking economic growth that is difficult to contain.

What steps have been taken by Turkey?

The effect of the lira currency crisis (Ⱡ) has not been fully realized.

So far, no comprehensive and drastic measures have been taken by Turkey, particularly in the financial sector, to curb the deteriorating effects of the currency crisis. Except, the retaliation announced by Turkey on the increase in import tax on goods imported from America, such as 120% of passenger cars, 140% alcoholic beverages and 60% on tobacco (Source: The Washington Post). Turkey also announced to boycott American goods.

What are proactive measures Turkey needs to take?

Turkey needs to have a recipe to curb the negative impact of the depreciation of Lira (Ⱡ) from spreading to other sectors in the economy.

But we hope Turkey will not seek assistance from the International Monetary Fund (IMF) to stabilize the currency and restore the financial system in the country. This is because the methods proposed by the IMF are not applicable for treating the economy during the turmoil.

In this regard, Malaysia's experience in addressing the economic downturn during the 1997/8 Asian Financial Crisis can be referred as a lesson.


Malaysia has experienced a currency crisis during the 1997/98 Asian Financial Crisis. In contrast to Turkey, the crisis in Malaysia stems from currency speculative attacks by international fund managers led by George Soros.

What is the impact of the currency crisis on the Malaysian economy?

The impact of the currency crisis was rapidly spreading in the economy. The Ringgit depreciated 40% against the USD, the Composite Index (KLCI) dropped from 1,200 points to 297 points, the capital market contracted by 70%, followed by high inflation, unemployment and national debt while the banking system was almost paralyzed as local banks has experienced liquidity shortages following the withdrawal of foreign capital from Malaysia's financial system. Overall impact, economic growth hit a negative level of -7.4%.

But quick action through the National Economic Action Council (NEAC) has saved the country's economy in just one year. The economic growth that plunged to a negative level of -7.4% (1998) was recovered to a positive level of 6.1% (1999) and 8.5% (2000).

What are the recipes for Malaysia's success?

There are 3 main recipes:

(i) Capital controls introduced on September 1, 1998. It aims to restrict the outflow of Ringgit abroad. As a result, the Ringgit offshore successfully brought home and the banking system was successfully restored.

(ii) Fiscal Stimulus Packages were introduced to stimulate the affected sectors in the economy. The measures received the most reactions from many scholars, especially the International Monitory Fund (IMF) as the approaches were against the wisdom of economic theory and conventional doctrine (see Figure 2).

For example, according to the IMF during the currency crisis, the central bank should raise the interest rates. But NEAC believes that if this action is taken, it will reduce the bank loans as companies doing business cannot afford to borrow and pay high interest rates. As a result, business and economic activities will slow down. Through the ‘chain effect mechanism’, it will further reduce the country's economic growth.

(iii) Lower the Statutory Reserve Requirements (SRR) at the Central Bank to provide sufficient funds to support the recipe (ii) above (see Figure 3).

Some have suggested that people to buy Lira (Ⱡ) to help the currency crisis in Turkey. Is the suggestion good?

The values of world currencies are determined in the Foreign Exchange Market (FOREX) based on the supply and demand of the respected currency in the market. If demand is high, the value of the currency will increase. Typically, demand comes from traders and currency speculators as well as countries that trade with other countries.

For the currency traders and speculators, they will buy the currency with the expectation that the value of the currency will increase in the future. But, are we prepared to buy the currency, for example, Lira (Ⱡ) if we expect the currency will continue to decline?

Is it now a good time to travel to Turkey?

Yes, because the value of Ringgit is higher than Lira (Ⱡ) now. But we have to allocate a slight additional cost to buy goods and services there due to price increases and inflation.


We sympathize with Turkey in the face of the currency crisis of Lira (Ⱡ) which could threaten the economic stability and financial sector of the country.

We hope Turkey will not seek assistance from the IMF, based in Washington, D.C . This is because, apart from the other conditions imposed, the IMF strategy to raise the bank's interest rates will further worsen the economic situation of the country in crisis.

On the other hand, Turkey needs to implement drastic measures in its own model, as Malaysia has done to address the economic crisis before it spreads to other sectors that could have a worsening negative impact on the Turkish economy.

Author: Dr Muzahet Masruri. Ph. D (Economics), University of East Anglia, United Kingdom