Digital Lira: Salvation for Turkish Currency?

In the second half of 2021, Turkey plans to start testing the " digital lira. " Initially, the project was supposed to be implemented last year, but the work was delayed for unknown reasons. For Turkey, digital lira is of particular importance. The population is open to such technologies - about 16% of Turkish residents owned a cryptocurrency at least once in their life (results of the Statista survey), and today, approximately 1 million citizens use any of the cryptocurrencies (data from the Central Bank).

The government needs to transfer these citizens into a controlled space - a digital currency issued by the Central Bank, with a system for identifying citizens better than decentralized cryptocurrencies. The fact that almost half of Turkish citizens, according to ING Bank, are ready to keep funds in cryptocurrency if the lira continues to fall in price adds fuel to the fire.

In 2020, the Turkish lira depreciated more than other currencies against the U.S. dollar. That is the eighth year in a row when Turkey's national currency has been falling in price over a year, rather than appreciating.

The decrease in the exchange rate of the Turkish lira against the dollar by years (in%). Source: Bloomberg

According to experts, introducing the "digital lira" into circulation will help improve the country's position before foreign investors and give confidence in the national currency.

Moreover, the Turkish currency also continued to depreciate and lost 30 percent of its value against the U.S. dollar since the start of the year.

The intense pressure on the Turkish lira has prompted a surprising shake-up in the country's economic management.

With the introduction of digital currency, President Recep Tayyip Erdoğan intends to create "the most favorable conditions for the institutional sector of the economy, and make the country's jurisdiction an attractive financial sector."

President Recep Tayyip Erdogan also dismissed Murat Uysal as Central Bank governor and appointed ex-Finance Minister Naci Agbal.

With the introduction of digital currency, President Recep Tayyip Erdoğan intends to create "the most favorable conditions for the institutional sector of the economy, and make the country's jurisdiction an attractive financial sector."

Before the launch of the "digital lira," there should be an instant payment system for digital currencies. It will make the transition as painless as possible. Last year, the Central Bank already became one of the Interbank Card Center shareholders, which, according to the Central Bank, should help "adapt to financial technologies."

To this end, in September last year, a new General Directorate of Financial Innovations appeared at the Central Bank, which is actively hiring specialists in blockchain technologies and is directly involved in the "digital lira" project.

As the head of the Central Bank, Naci Agbal, said earlier, research work has been completed. It is not known whether Turkey will be able to do everything on time, or the project will have to be postponed again. However, given the lira's state, the introduction of the digital lira may become a top priority project for the country's leadership.

Azad Hasanli, financial expert