What is the reason for the devaluation and how to prevent it?
Ooh isn't that the million dollar question; we don't know for sure. Economists spent about 40 years insisting that they do know until enough pressure mounted on the empirical side that they silently backed off. Many haven't gotten the hint yet and still parrot their old textbooks (esp. in our country). Their textbooks, following the monetarist school, said that the Equation of Exchange in it simple form MV = PY dictates that changes in money supply are the main culprits behind price changes and price changes, aka inflation, create pressure on the local currency; apart from the fact that QTM is itself wrong and simplistic, still that V alone is a big motherfucker (velocity of money, how many times a unit of currency changes hands in the market). It's hard to calculate.
Monetarist theory of inflation was officially abandoned in 2012 by the fed due to the empirical tests since 1989 not exactly supporting it. We're talking about monetarist theory of inflation in relation to devaluation because a related corollary in PPP theory of exchange rate says that the amount a currency loses or gains value depends upon the difference between the country's inflation and that of its trading partners. This doesn't hold 1:1 either. In some cases it is 1:3, in some it is 3:2. But at least their direction is the same, i.e. inflation does cause devaluation. To what extent, is determined by many other factors. Reliability of methods of monetary expansion (open market operations, reserve requirement reduction) in driving up aggregate demand is also very hit and miss. There's again direct correlation, but the extent has high variance.
In the past decade, after giving up the QTM and PPP exchange rate theories as the gospel, exchange rates have been postulated to depend on a myriad of factors by economists. The strongest factor that a country controls according to the orthodoxy is interest rate parity. If there's nobody to object, an economist will tell you this is the new golden standard, with abundant empirical evidence for it. The "abundant" evidence comes from Western European countries in times when there's no crisis (for developing countries, and for developed ones in times of crisis, i.e. 2008, it doesn't hold). This can be explained away by our old fellow George Soros' reflexivity theory. Financial and economic actors all learn orthodox economics and when doing their jobs normally they tend to expect and act based on those theories. So these theories tend to have a self-fulfilling prophecy effect, until a crisis hits and they don't work anymore. After 2008, starting from 2009 until 2022, western markets, their institutions, etc. bet every year that interest rates will go up due to recovery. Every year they were wrong. There's no field of science you can pull that shit off and keep your job (except psychology).
Anyway, interest rates is a tool that you can use to influence aggregate demand; but that's only one factor. Bankers in rooms full of screens, shorting dollar/tl can be another factor. Since Forex is seen as a decentralized and spread-out market, many see these insinuations as kind of a conspiracy. But Citigroup has a huge slice of the Forex market. Top three financial institutions active in Forex trading control about 50% of the market. Price leadership cannot be that hard with that level of contribution. You pair that with the shock of dropping credit ratings from institutions whose political motives have been proven again and again, and you can have a nose-diving currency. These things are proxies for foreign direct investment odds, and when that dries up, your currency takes another hit from that front as well.
These all depend on you not having a massive budget surplus, and good reserves. Hence they can't attempt to hurt you if you're not vulnerable already. Another sign of vulnerability is obviously political turmoil and legal unreliability; these again influence FDI, capital flight and investment in manufacturing which have a direct effect on both foreign currency supply and also meeting aggregate demand when it increases. So after the ball is set rolling by a combination of factors (such as budget deficits, monetary base expansion, low interest rates driving aggregate demand driving inflation, supply shock due to a pandemic, falling credit scores, TL being shorted, etc.) capital flights start happening and demand for foreign currencies increases as they are seen as the best hedges against inflation. All of these are positive feedback loops. Devaluation leads to inflation, inflation leads to inflationary expectation which itself leads to economic activity (as commodities gain value against local currency; incidentally the main contributor to our 2023 4.5% GDP growth) which fuels inflation, fueling devaluation. On the behavioral front, people have inertial expectations; when things have been a certain way people expect them to continue being that way, even in cases where evidence points to the contrary. Behaviors are not determined by evidence per se, or at least they don't respond to them fast. Prices are sticky, human expectations are that way also. So capital controls as far as you can pull them off, and controlled devaluation by using the reserves must be used to combat this inertia; otherwise if you leave all to market forces, market forces will play a cruel trial and error with you. It's psychological warfare. This is also why changes of administration are quite effective, as they can change expectations, and reduce aggregate demand.
To top it off, different forms of contraction of monetary base have differing effects on aggregate demand based on minutiae of tax policy, how responsive the private sector will be to these changes in policy which is in turn based on expectations again; effectiveness of tax rate tinkering again depends on the previous factor along with aforementioned confidence, political-legal stability, etc. But tax rate hikes do influence aggregate demand, esp. if cash reserve ratio is also increased which you can only do if you're confident about solvency of your banks; hard to do if you are already inevitably dealing with all these problems of low FDI, inflationary expectations being high, service sector growth model, etc.
We're having this discussion because of the predicament our country is in but most political and economical analysis about the root cause of the problem completely ignores the rationality that led to this situation. Using political economy as a guide for analysis, one can use the now mostly discredited IS-LM equilibrium as a simple model (sometimes patronizingly called a lie-to-children model) to explain the reasons behind the admin's decision to lower the interest rates. It's no secret that the growth model pursued by the ruling party has been a construction-sector based growth; the construction sector famously is most sensitive to interest rate fluctuations due to its capital-intensive nature and it being fused by the neck to the housing market. In the IS-LM model, GDP growth drives interest rates down. If your growth is construction dependent, this is doubly true. It's not hard to see how the financiers and capitalists behind the ruling party might have tried to justify their hunger for fast low-interest credit by citing some MMT reasoning and blabber about a China model to the party's leader, as could be gleaned from the former finance minister's mumbling about heterodox economics, Schumpeter and "creative destruction". It's also apparent that another angle of attack to ensure the enactment of these policies and the president's approval was the religious arguments used, but these arguments' secondary and auxiliary nature is apparent in the light of the material motivations discussed above. Another line of reasoning can be investigated about how the methods trialed for growth before may have proven unsatisfactory, and another trial might have been due.
Anyway, to keep the GDP growth going and satisfy the capitalists behind the financing of the ruling party, they obviously chose to hear the arguments of one side at the expense of others calling for increasing interest rates to cool off the economy when supply is strained, and monetary base expansion can spiral out of control due to predicted budget deficits (a prediction that if it actually existed should have seemed quite serendipitously prescient as energy prices soared due to the coming war)
If it wasn't for the compounding factors of supply shock due to the pandemic, and the energy crisis due to the Ukraine war, these policies might have not been as destructive as they have been. The consultants who have the ears of the president obviously didn't think they are going to cost the ruling party dearly. But the fact that a 180 turn was executed (not in action fully, but at least in rhetoric) is further proof that all those reasonings (including the religious one) were just what consultants were whispering in ears to provide justification. After they failed, they were abandoned summarily. The way they were abandoned is evidence enough that they cannot be used to account for those decisions as the firm convictions (forming the foundations of policy) that they were made out to be in the analyses provided by liberals.
Our capitalists are lazy. I was adamantly rooting for this laziness to cost the ruling party dearly in the elections in order for them to learn a lesson (and also to break their monopoly on public discourse, breaking increasingly exclusive access to lines of credit to partisans, which causes huge amounts of corruption and income inequality, the bane of a society's existence due to erosion of equality of opportunity that is the main cause of social dynamism).
That didn't happen but still you gotta learn from 100% inflation, drying up of foreign investment, growing budget deficit, etc. And some learning was done. Who will have the ears of big shots of the ruling party; how or if those capitalists will be forced to change course and find new ways of making money with dried up lines of credit, where those wills will be channeled to nobody knows. But it's doubtful they can go back to their old ways seeing how they have damaged the ruling party and its reputation. I hope this new emphasis on the defense sector is harbinger of a heel turn from construction sector growth to export-led growth (based on high added value technological products), and the industrial experience is channeled to civilian side. Maybe the fact that our country is now the "prototype heaven" of defense industry is a sign that this keel turn is being forced upon the construction sector capitalists and the peacock is showing its feathers to attract new lines of credit. But I'm afraid of the scenario that the exports from defense sector (which is not the best export market due to rigidity and importance of old alliances and ecosystems) turn out to be unsatisfactory and this is interpreted as a sign of failure of export-led growth for our country. Only time will tell, but trying this is definitely better than being stuck with short-term thinking.
On a final note about causes of devaluation I want to back off to where I mentioned reflexivity and economics as a discipline being a self-fulfilling prophecy. Well it isn't fully, that's why economists fail so much to predict stuff, but for a certain subset of countries their stuff works much better; these I call "the vanilla countries". Countries which have a sanitized picture. This sanitized picture helps them get investment, tourists, etc. The same picture helps their institutions be predictable, since they respond to data the way it is prescribed. Because they do, their markets also reacts in more predictable ways (as they are also dominated by the kinds of thinking prescribed by economical orthodoxy). There's a general sense of reliability. This has nothing to do with being a liberal democracy or with a perfect and independent judiciary or anything which our liberals yap about. Until 5 years ago when Xi and U.S. establishment decided to break the status quo, China was a fairly vanilla country. Turkey was a fairly vanilla country until 2010. Turkey still has quite a sanitized look in the developing world. A lot of this is achieved by t.v. series if you'd believe it. We should try to achieve the sanitized look in the eyes of the first world also. Then we can also catch the virus of reflexivity. Our ruling elites are not that elite. They don't know how to react to adversarial rhetoric or actions. They're hasty; they don't have tact, they're amateurs mostly. They started out as people who didn't believe in
"mon chers". Our de-sanitized look isn't purely due to us being at odds geopolitically with the Western powers. We can stay at odds and improve our image at the same time. This image is a huge factor in the world of finance and investments. It creates an aura of reliability.
www.statista.com
When i even laze to go to bathroom to pee 
