TURKEY: Collapsing TRL hurts Turkish Cypriots

13 mins read

* Analysts expect TC coalition turning to Ankara for extra cash


By Kyriacos Kiliaris


A crashing Turkish lira, political unrest in Turkey and a widening trade gap, have led to a double figure inflation growth for the second year in a row in the north, heavily impacting the Turkish Cypriot economy. The Euro-TRY exchange rate has plummeted in five years from 2.32 in 2013 to an all-time low on August 13 when it reached TRY 7.82 per euro, losing almost 40% of its value just in the current year.

As expected, the collapse of the Turkish Lira has had its toll on the Turkish Cypriot community as the inflation growth rate had reached a staggering 19.41% in June, compared to figures same time last year, as announced by the Turkish Cypriot planning bureau. While figures for the months that followed are not yet available, it is believed that due to the continuing fall of the TRY, inflation has broken every record.

Announcing the figures in July, Odul Muhtaroglu, the head of the public planning bureau had directly linked the increase in inflation to the crumbling Turkish Lira. As the TRY continued to fall over the following months, it is estimated that inflation has rocketed.

The situation in the import-dependent north is made even worse by the fact that the vast majority of imports are concluded in a foreign currency, mainly USD and EUR., widening the trade gap and weakening even further their purchasing power. The Turkish Cypriot community exported goods worth USD 105.6 mln while importing goods worth USD 1.6 bln.

The diminishing purchasing power was evident during the week that marked the celebration of one of the most important festive period. Normally, the Kurban Bayrami (the feast of sacrifice) would see Turkish Cypriots flooding the market, with shopkeepers expecting a serious income, but this year found them feeling disappointed by the turnout at stores. The daily Yeniduzen and Kibris newspapers reported comments from shopkeepers who said that the market was saved by Greek Cypriots and foreign tourists who flooded the market. The two papers had comments from shopkeepers in the traditional Bandabulya (Pandopoleio) market in north Nicosia.


Crossings on the rise


Greek Cypriots and tourists were encouraged by the significant drop in the value of the TRY. During the week of the biggest drop in the price of the Turkish Lira, newspapers on both sides of the island published articles with photos of long queues of Greek Cypriots crossing to the north with their cars, also queuing at petrol stations to fill their tanks with cheap fuel. The crossing points saw the heaviest traffic from the government-controlled areas on August 13 when the TRY was at its lowest compared to the EUR. The price for a litre of unleaded 95 petrol was 55 cents.

Yeniduzen reported that Greek Cypriots crossings to the north increased 46% in the first seven months of the year, compared to 2017, reaching 749,285.

Supporting the case that Greek Cypriot were encouraged by the drop of the Turkish Lira and are spending more in the north than before, JCC statistics show that Greek Cypriots spent 32% more in the first seven months of 2018 than they did in 2017. According to JCC, cards issued by banks in the south were used for purchases reaching EUR 6.7 mln in the north for January to July 2018. On the other hand, Turkish Cypriots spent EUR 11.5 mln in the south during the first seven months of 2018, 22% less compared to the same period last year.

In order to combat inflation, the Turkish Cypriot administration readjusts the minimum wage every six months. In June this year the minimum wage was set at TRY 2600 (gross), which equals, today, to 371 euros, based on the Friday exchange rate of 7 Turkish Liras to the EUR. Although the TC authorities had raised significantly the minimum wage from TRY 2,365 (gross), people’s purchasing power has dropped significantly. The minimum gross wage in the north was 592 euros in 2013, 436 in January 2018 and 371 in June.

A family of four relying on one minimum wage will not be able to survive even if they chose to feed themselves only on simits (Turkish bagels) and tea. Purchasing three meals of one simit and one tea a day for a family of four costs 84 TRY, that is a total of TRY 2,520, which is some 240 Lira more than the net minimum wage.


Community in dire straits


Sener Elcil, the head of the Turkish Cypriot Teachers’ Union (KTOS) told the Financial Mirror that the community is in dire straits. He said that as everything is indexed to a foreign currency, Turkish Cypriots are paying a high price for almost every item in the market.

“If you go to buy a watermelon from the market, you will have to pay for the fluctuations of the Turkish Lira as they are mainly imported from Turkey”. Elcil added that this is just a small example of how the crashing lira is affecting their lives.

“Many services are also indexed to a foreign currency. Rents are also indexed to a foreign currency, while a number of private schools’ fees are in euros,” he explained.

On Friday, the union of the Turkish Cypriot secondary school teachers KTOEOS, called for authorities to fix the exchange rate between the TRY and the GBP, which is the currency most rents are denominated in.

Costs are also rising for the TC administration with authorities announcing a series of measures such as tax relaxation, VAT on property and rents to help lower income families. The ruling coalition has also decided on measures which aim to bring in cash such as the one-off tax on large properties, and a one-off tax will be collected from casinos and betting offices. However, the measures announced by the coalition do not seem to be enough to counter the crashing weight of the TRY collapse.


Fix exchange rate for imports


Asked what could be done when the TRY had started its free drop a few months back, Mustafa Besim told the Financial Mirror that “there are thoughts of fixing an exchange rate for imports for a period of time. This way all transactions like import tax and transfer deals in real estate could be made with a fixed exchange rate. However, as Turkish Cypriots do not have the ability to form their own monetary policy, there is not much that could be done towards solving the problem”.

Contributing to the discussion, Dr Erol Kaymak, professor at the department of Political Sciences of the Eastern Mediterranean University in Famagusta, said that the coalition does not have a magic wand and that it has basically remained silent during the crisis.

He said that they do not have ways of protecting themselves from the crisis which was imported from Turkey as they do not have a currency, nor a central bank of their own.

“We are indebted to Turkey and thus we cannot take decisions like imposing austerity measures on our own”, he said.

Dr Kaymak predicted that the ruling coalition will have to ask for a supplementary budget from Turkey before the end of the year as he predicted that with the collapse of the TRY, the budget will not be sufficient.

From an economist’s point of view, Ioannis Tirkides, Head of Research at the Bank of Cyprus, explained that the Turkish Cypriot economy operates to a significant extent on foreign currencies which mitigates partially the impact.

“The banking system is small with a significant part of assets and liabilities in foreign currencies. To the extent to which foreign currency liabilities (deposits), fund foreign currency assets (loans) not loans in Turkish lira, the currency risk in the banking system is small.”

Tirkides said that the crisis will encourage the further use of foreign currencies in the north. But Turkish Cypriots cannot abolish the Turkish lira in the north altogether.

“The fundamental question regarding these developments is the longer-run prospect of Turkey in terms of its relations with the West. The exposure of European banks to Turkey’s external debt will damage their profitability but will not cause major problems. A break of Turkey with the West will have more reaching implications. For us in Cyprus, an unstable Turkey with an aggressive foreign policy agenda that extends to our [energy] EEZ is a cause of concern and careful planning,” making the solution of the Cyprus problem “all the more difficult, if not impossible.”


Impact on banks, immigrants


CIIM professor Dr George Theocharides told the Financial Mirror that he saw two issues: on the one hand, the impact on European banks exposed to Turkey and billions borrowed by Turkish citizens, resulting in mass bankruptcies in the case of loan defaults, while on the other hand there is also the risk of a mass flow of migrants from Turkey to Europe, straining national economies and welfare systems further.

He said that Turkish citizens’ and private institutions’ debt towards European banks is 50% of the country’s GDP.

Dr Theocharides said that Turkey’s problems are not related to what the country’s president Tayyip Erdogan has dubbed as “an attack from the West” but are of a structural nature. He explained that they are the result of not implementing a series of much needed structural changes.

“Furthermore, the fact that all authorities are being transferred to just one man is scaring away investors,” he said.

The CIIM professor noted that independent institutions like the country’s central bank are stripped of their authorities and are not free to exercise their monetary policies.

“Turkey should increase interest rates, which will draw in money from foreign investors; however, President Erdogan does not agree with the policy of increasing interest rates, pushing inflation upwards”.