A state of Economic instability & Currency devaluation caused by various micro & macro-economic factors is termed as Currency Crisis. Imagine a situation in which your country has colossal amounts of foreign loans outstanding & at the same time, your currency is falling in value. Not only does currency crisis create huge complications for the operations of an economy but also ultimately leads to the collapse of the entire banking & financial system of the economy.
Who Stand Responsible?
The major question that needs to be answered is- Whether the Central Bank of the Country will be able to stabilize the exchange rate with its operations? Here, the Government, the Investors & the Central Bank have a crucial role to play. The primary tussle encountered is the attempt to meet its financial obligations with the currency losing its value in the foreign exchange market & investors losing their interest in the operations of the Economy. Currency crisis can have a major effect on both- the developing & the developed nations if the resources required to tackle the problem are not properly managed or taken care of. A country experiencing huge amounts of capital inflows can soon see itself in a situation of capital flight as the major investors withdraw their stakes leaving the country in a situation of political & economic turmoil. Having enormous amounts of debs at its discretion can create disturbance in the growth & development process & can create a plethora of unfavorable activities causing situations which are difficult to enumerate & solve.
The Lasting effects of Financial & Currency Crisis can be felt for many more years than it seems. Taking ‘The Sub-prime Crisis’ as one of the biggest instances of disaster in the financial system, the repercussions it imposed on both- the developing & developed economies can be felt even today. 10 years down-the-line, countries like India, Argentina, Mexico, Chile etc. are still encountering the problems of unemployment, volatile stock markets & other atrocities caused due to the Credit Crisis of 2007-8.
Turkish Lira – The Fallout
The process of currency crisis can be explained with the help of an ongoing financial & economic crisis in Turkey which is the outcome of the faulty policies & unorthodox ideas adopted by President Recep Tayyip Erdogan in an attempt to develop his country by the means of living on excess foreign investment & capital. The basic idea of the President was to keep the interest rates low in spite of having large amounts of loan at their discretion just to attract the investors to put their money into the Huge Construction & Rehabilitation projects of Turkey. The FDI in the country kept on increasing & the current account deficit reached a staggering $550 billion. With just $85 billion as foreign exchange reserves, Turkey needed approximately $200 billion to fund its operations & current account deficits every year. The major repercussion came into play when the United States President Donald Trump announced doubling of the import taxes on Turkish steel & aluminum, a plan designed to affect the release of US citizen Andrew Brunson and 15 others who were held as hostages in Turkey for more than 2 years on account of charges of terrorism & bribery. Therefore, the TRY/USD exchange rate got affected in a large scale reaching the record low of 6.46 lira against one USD. In such a short span of time, a country with strong banks, healthy financial services & brilliant business culture came down to ruins as the investors lost their faith & confidence in the financial system & its operations.
The Indian Currency Cringe
India, now regarded as the fastest growing economy of the world, has exposed itself to various factors which can hinder economic progress of the financial sector. Be it the Trade War between the United States & China, or the collapse of Turkish lira, both impose a major threat to the Indian Currency & its operations. The Indian currency closed on an all-time-low of ₹72.91/$ on the 20th of September, 2018. Global Events & other currencies like the Argentine Peso & South African Rand are also victims of the ongoing events in Turkey. It’s the interdependence of Nations which lead to such disastrous outcomes & can create complications especially for the developing nations.The Crude Oil problems aggravate in India as US imposes various sanctions on the export of crude oil in Iran. Since India is largely dependent on Iran as it imports around 75% of its oil resources from there, it is facing problems in the form of huge import bills & current account deficit which is affecting its growth & development process & harming its operations. Petrol & Diesel Prices in India have crossed the ₹80/litre mark & are expected to rise further.
Therefore, the crux of the entire situation of Currency Crisis is the use of irrational & poor economic & financial policies which lead to the devaluation of a currency value in the foreign exchange market. A Well-designed & properly articulated plan can keep a country away from the aftermaths of the Currency Crisis situation & can work wonders in favor of a country & its financial system. The one thing that matters is the Stability & Integrity of financial affairs, a mistake committed on part of countries like Turkey & Argentina, which ensure a firm & well-balanced system free of all Corporate & international affairs mishaps & adversities. Currency crisis can come in various forms which can be predicted if properly taken care of. This requires certain autonomy & freedom given to the Central Banking system of the country which can make use of various quantitative & qualitative methods including interest rates, open market operations, margin requirements etc. to prevent financial disasters & catastrophe.