ISTANBUL — Turkey’s President Recep Tayyip Erdogan is set to meet Thursday with the leader of El Salvador, the first country to adopt bitcoin as legal tender, while Turkey’s central bank left interest rates unchanged, which is likely to do little to help the des country to stop currency crisis.
As El Salvador plans to issue a 1 billion bitcoin-backed bond issue, the value of bitcoin dollars has plummeted.
The Turkish government has taken a restrictive approach towards cryptocurrencies in recent years, but analysts expect Mr Bukele to champion the use of crypto during the meeting, which comes at a time of turbulence in Turkey’s economy. The Turkish lira lost around 40% of its value against the dollar over the past year, sparking occasional protests and threatening the financial stability of the country, which is a member of the Group of 20 and the North Atlantic Treaty Organization.
Separately, Turkey‘s central bank left its benchmark one-week repo rate at 14% on Thursday. Officials cut interest rates for the previous four consecutive months, hastening the currency’s collapse.
Mr Erdogan has called for lower interest rates as part of his unorthodox strategy to boost economic growth and has fired almost any senior Turkish official who opposes his vision. Rate cuts over the past year pushed up inflation through cheaper lending while eroding the purchasing power of the lira and raising the prices of essential imports like food and energy.
To offset inflation and a sharp devaluation of the lira, Turks have piled into cryptocurrencies. The meeting with Mr Bukele comes as Mr Erdogan said he is proposing new laws that will regulate the emerging assets. While Turkey banned cryptocurrencies as a means of payment last year, Mr Bukele’s government became the first in the world to adopt bitcoin as its national currency.
Mr. Bukele is one of the world’s leading cryptocurrency advocates and analysts expect him to raise the matter during the meeting with Mr. Erdogan, but it remains unclear whether the Turkish government will change its stance on the issue.
“As an administration, they’re a vocal supporter of bitcoin, so I’m pretty sure he’ll address the bitcoin issue,” said Turan Sert, an advisor to Turkish cryptocurrency exchange Paribu. “You might listen to him, but I’m not sure it will have a big impact on the Turkish government’s thinking.”
The two leaders exchanged welcome tweets and emojis of each nation’s flag. Mr Bukele wrote his visit in Turkish, and Mr. Erdogan written in spanish that the nation attached great importance to the visit.
“Greetings to everyone in Turkey from El Salvador, the land of #Bitcoin,” Mr. Bukele said.
An elected leader who has subverted Turkey’s institutions and overseen a crackdown on his political opponents, Erdogan has warm personal ties with autocratic leaders from around the world, including Russian President Vladimir Putin.
Mr Bukele, a populist elected in 2019 as a political maverick amid discontent over violence and poverty, has been criticized by the Biden administration for increasing authoritarian control of the country, replacing constitutional court judges and attorney general.
El Salvador has viewed bitcoin in part as an opportunity to break away from a dollarized economy, the nation’s other legal tender for the past two decades.
In recent years, Turkey has worked to lower its pegs to foreign currencies, reduce foreign currency debt and encourage locals to trade gold and other currencies for the lira.
However, these efforts have been called into question. A recent initiative to encourage locals to freeze their lira deposits for at least three months has generated little demand. The Central Bank of Turkey recently extended the program to companies to boost participation.
Even if the central bank holds interest rates, investors and analysts expect the lira to continue to come under pressure from high inflation and locals to continue shifting their money into foreign exchange, gold and other assets.
“That will ease some of the markets’ concerns about more negative real interest rates, but it doesn’t solve any of the underlying problems related to fighting rising inflation,” said Phoenix Kalen, strategist at Société Générale. “There will still be demand for foreign exchange as inflation rises.”
Turkey’s annual inflation rate rose to 36.1% in December from 21.3% in November, and economists expect official figures to rise to 50% in the coming months.
“We’re going to have a really tough quarter of 2022. It’s going to be very tough for Turks,” said Mustafa Sonmez, a Turkish economist.
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