Turkey’s real exchange rate lower than during crisis-hit 1990s

The Turkish lira’s real effective exchange rate (REER), adjusted for consumer price inflation, is hovering near the lowest levels on record.

The value of the lira against the currencies of Turkey’s major trading partners was at 60.55 in May, close to the 60.51 it posted in August, the weakest since records began in January 1994, central bank data published on Friday showed.

A lower REER increases the competitive advantage of a country against its trading partners. The figure is weighted according to the relative importance of each trading partner to the home country. Turkey’s biggest trading partner is the Eurozone.

The lira has fallen to successive record lows against the dollar and euro over the past year. It reached an all-time low of 8.84 per dollar on Friday.

The REER of the lira against developed market currencies was at 67.24 in May, the weakest level since September 1994. The 1990s in Turkey were symbolised by financial crises, soaring inflation and failed IMF rescue programmes. Turkey removed six zeroes from the lira in 2005 as part of economic and financial reforms.

Turkey’s government is seeking to drive economic growth by boosting exports. But unorthodox stimulus measures, which included engineering a borrowing boom by cash-strapped companies and consumers, have weakened the nominal value of the lira and driven up inflation, which stands at 16.6 percent on an annual basis.

A weaker currency and higher inflation typically hit the spending power of a country’s consumers, particularly their ability to purchase imports.

Turkey is traditionally a net importer of goods due to its reliance on imported oil and natural gas and demand for raw materials and consumer goods. That has widened the country's current account deficit, pressuring the value of the lira.