Northern Cyprus: Lira’s Woes Bite.
As the world focuses on the crisis facing Turkey’s lira, the Turkish part of Cyprus faces an arguably worse situation that is not of its own making. The self-declared Turkish Republic of Northern Cyprus (TRNC) is heavily reliant on “big brother” Turkey due to its political and economic isolation from the rest of the world, a result of its official break from the Greek Cypriot south in 1983.
The Turkish third of the eastern Mediterranean island uses the lira for day-to-day business but many items such as cars and electronic goods, as well as property costs, are priced in foreign currency – leaving the territory’s 300,000 inhabitants facing a greater threat from fluctuations than those in Turkey. By using the lira, TRNC, which had a trade deficit of $1.67bn last year, is deprived of many of the vital economic tools – such as raising interest rates – that could help it keep down the cost of living.
“They say that when Turkey catches a cold, northern Cyprus gets a fever,” said Fiona Mullen, an economic consultant based on the island.”One of the main problems is that people mostly earn in lira but many costs such as housing, cars and computers are priced in pounds, euro or dollars,” she added “Also, even though both Turkey and northern Cyprus operate in the lira, imports from Turkey are priced in hard foreign currency and that’s really killing northern Cyprus.” The lira crisis, which came to the fore last week when the US announced tariffs on Turkish steel and aluminium but has been rumbling on for more than a year, has seen the Turkish Cypriot government introduce temporary measures, including tax cuts on basic foodstuffs and cheaper electricity tariffs, to alleviate any immediate price hikes. “Food prices have almost doubled in the last week because the country is not self-sustainable,” economist Ozlem Cilsal said. “People are facing problems paying their rent in [British] pounds.” One car dealer told local media that prices had risen by 50 per cent in the past week while mobile phone salesman Fuat Cirik told the Yeni Duzen newspaper there had been a 20 per cent rise in 48 hours.
“We cannot replace the merchandise we sell,” he said. “In one single hour, the price of phones went up by 50 liras [$8.12].” Yenal Surec, a senior economics lecturer at Eastern Mediterranean University in Famagusta, said the most important effect of the lira’s devaluation would be on inflation, which currently stands at 20.3 percent. “Domestic production is very limited so most goods are imported and even products imported from Turkey are priced in euro or dollars,” he said. “Therefore, as soon as the Turkish lira devalues we see a sudden increase in prices which makes life difficult for consumers.” Turkish Cypriots are understandably nervous of price rises, creating an “atmosphere of panic” when the lira plunged to below seven to the dollar earlier this week,” said Surec. “There was anger among consumers when some companies hiked their prices beyond the lira rate and they are demanding price controls from the government,” he added. In response, the government also announced measures such as fixed foreign exchange rates for rents and school fees and tax reductions for restaurants and hotels, while calling on people to adopt cost-cutting measures – Serdar Denktash, the finance minister, set the tone this week by turning up at parliament on a bicycle.
The island’s north is heavily dependent on tourism and universities to draw in foreign currency, as well as investment and other financial support from Turkey, the only country that recognises the breakaway republic. Cyprus was divided in 1974 when Turkish forces invaded in response to a military coup backed by Athens. The international community considers the southern Republic of Cyprus, as European Union member, to be the representative government for the whole island. The TRNC’s Central Bank is unable to do anything to affect the value of the lira and is restricted to limited measures such as blocking foreign currency loans for employees paid in lira, which it introduced this week. However, Rustu Yucel, an economics columnist for the Diyalog newspaper, said the bank had added to the crisis by raising the public’s appetite for foreign currency credit in recent years through low-interest rates. “In northern Cyprus, people are used to this credit boom and have invested in property – buying and selling property is the main business in northern Cyprus now,” he said. “They believe they’re getting richer but this boom is based on credit.
When people can’t get credit, they will not be able to invest and the economy will suffer.” Yucel condemned the steps taken by the government as “symptomatic” policies that failed to address debt problems and warned of bankruptcies as people defaulted on foreign currency loans. “They will not solve anything. If there’s another foreign exchange rise these measures will be meaningless,” he said. “There’s no real big impact on the economy.” The Turkish Cypriot authorities are looking to Ankara for an economical solution lead in recovery efforts. This week, President Mustafa Akinci and Prime Minister Tufan Erhurman met Binali Yildirim, Turkey’s parliamentary speaker and former prime minister, during his visit to the island.
According to official broadcaster BRT, Yildirim assured them the Turkish government was doing everything to deal with the crisis. “The [Turkish Cypriot] government will demand extra finance from Ankara because the exchange rate increase was not foreseen,” Surec, the university lecturer, said. He called on Turkey to defend the lira by restoring the confidence of foreign investors. Economist Cilsal added: “We use the Turkish lira and we can’t do anything on monetary policy, we’re totally dependent on Turkey economically.
“The lira’s fall has seen Greek Cypriots flock across the border to take advantage of the weakened currency, with most filling their cars with petrol or bulk-buying cigarettes. Surec said the crisis could see fresh impetus given to long-running negotiations to unify the island on federal lines.”When the economy is running properly nobody demands a solution, but as soon as a crisis starts everybody voices these kinds of expectations,” he said. “Maybe if a new negotiation process starts we could have a solution.