The economy in 2018: Currency volatility, trade wars, cryptocurrency goes bust

Turkey’s economy had been grappling with high levels of debt in the private sector and significant foreign funding in the banking system.

By Elton Gomes

As 2018 draws to a close, Qrius looks back at the major issues that dominated the Indian and global economy in 2018.

The Turkish lira crisis

In August, the Turkish lira plunged by more than 20% against the US dollar. The decline was a record low for the Turkish currency. The lira’s fall accelerated dramatically in 2018, but its one-day collapse in August was enough to sent global markets into a tizzy.

The crisis began days after US President Donald Trump announced a doubling of steel and aluminium tariffs on Turkey, as Washington pushed Ankara for the release of Evangelical Christian pastor Andrew Brunson, who was held on terrorism charges.

Turkey’s economy had been grappling with high levels of debt in the private sector and significant foreign funding in the banking system. Turkey is also highly dependent on foreign-currency debt. Corporate, financial, and other foreign currency debt, mostly dollar-denominated, amounts to up to 70% of Turkey’s economy. 

Another problem was Turkey’s insufficient foreign exchange reserves. Turkey has foreign reserves of $130 billion with a short-term foreign debt of $180 billion. Nearly 70% of its overall debt of $460 billion is foreign.

Global markets were already jittery due to a trade war between China and the US, and a falling lira only worsened the situation. Investors had several reasons to worry as emerging economies can be extremely vulnerable amidst a declining currency.

India also faced some repercussions, with the rupee closing at around 69.90 against the US dollar in August. “The fall in rupee is in line with global decimated emerging markets currency, accentuated by the Turkish crisis,” Sanjiv Bhasin, executive vice president of markets and corporate affairs, told the Times of India.

The RBI reserves issue

In November, media reports suggested that the Finance Ministry was seeking a transfer of Rs 3.6 lakh crore, roughly 2.1% of last year’s GDP, from the Reserve Bank of India (RBI).

However, the government later backtracked saying there was no such proposal. “There is no proposal to ask RBI to transfer 3.6 or 1 lakh crore, as speculated,” Department of Economic Affairs secretary Subhash Chandra Garg said in a tweet.    

Garg added that concerning the reserves, the government only discussed how to fix the appropriate economic capital framework of the RBI. That framework is used to decide the adequate amount of reserves the central bank should maintain.

Also read: Has the Centre invoked Section 7 to overpower RBI’s autonomy? Full details

“I don’t want any money from the Reserve Bank’s reserves at the moment. The only question which was raised were really two…there were several questions around two important facts — first relating to liquidity in certain sectors of the economy and availability of credit,” Finance Minister Arun Jaitley said, IANS reported.

The issue led to much debate about the state of institutions under the Narendra Modi government, with several questions being raised over the Centre’s interference in state-run entities. Though the issue has not yet been resolved, it seemingly led to RBI governor Urjit Patel stepping down, almost a year before his tenure was to end in September 2019.

Urjit Patel resigns

RBI governor Urjit Patel abruptly resigned on December 10. Although Patel cited personal reasons, it seemed apparent that he was a victim of the ongoing tussle between the central bank and the Centre.

Patel’s tenure was the shortest by any central banker in India since 1992. Prime Minister Narendra Modi and Finance Minister Arun Jaitley took to Twitter to praise Patel for his work, but the opposition was quick to condemn the praise.

A nine-hour board meeting on November 19 had sent out a conciliatory signal. At the meeting, it was agreed that the RBI would ease borrowing terms for SMEs (small and medium enterprises); a panel comprising RBI and Government nominees would be set up to discuss the way in which the central bank’s reserves can be uses; and RBI would review which banks could lend again. That’s why Patel’s announcement caught some RBI board members by surprise. But rumours were rife that Patel’s resignation was on the cards. Patel was replaced by Shaktikanta Das.

India gets new CEA

After former Chief Economic Advisor (CEA) Arvind Subramanian announced his resignation in June, the Modi government was tasked with finding a replacement. Months before the announcement of the interim budget early next year, the government appointed Krishnamurthy Subramanian as CEA.

Subramanian’s appointment comes at a time when the Narendra Modi government is expected to outline its vision for further reforms and inclusive growth in the interim budget that will be announced on February 1, 2019.  

Subramanian’s first major task as CEA will be to contribute to the process of preparing the interim Budget. He will also have to work on the Economic Survey for 2018-19, which will likely be presented before the full Budget for 2019-20 in July next year.

Also read: Former CEA Arvind Subramanian’s demonetisation comments sends BJP up in arms; here’s why

The IL&FS crisis

The Infrastructure Financing and Leasing Services Ltd (IL&FS) faced a credit crunch, which resulted in severe disruption among India’s financial markets. The credit crunch triggered mounting concerns about risk in India’s shadow banking sector.

The IL&FS Ltd is an investment company and serves as the holding company of the IL&FS Group. Most business operations within the group are based in separate companies that form an ecosystem of expertise across sectors such as infrastructure, finance, and social and environmental services.

Till the end of September 2018, the IL&FS had defaulted on debt obligations amounting to Rs 3,800 crores. While the IL&FS is a private entity, over 40% of its shares are held by government-owned firmsthis meant that the government had to ensure the solvency of IL&FS in order to maintain financial stability in the country.

Also read: IL&FS: Has PM Modi unwittingly helped cronies and punished investors?

The government blamed IL&FS’s board and management for the crisis. Recent reports mentioned that the government wants to reopen balance sheets of the IL&FS Group and its subsidiaries for the past five years to ascertain financial mismanagement. This is the first time the government wishes to do so, and it will invoke its powers under Section 130 of the Companies Act.

The move comes after the Serious Fraud Investigation Office has found details of corruption, personal enrichment, and other non-transparent deals.

US-China trade talks

2018 witnessed a whole new war between Washington and Beijing. With US President Donald Trump imposing tariffs and China hitting back with new tariffs, the trade war is anything but over. Beijing and Washington were unable to reach a truce, but officials remained optimistic about ongoing trade talks.

Chinese President Xi Jinping met Trump at the G20 summit in Buenos Aires, Argentina and both sides agreed to a ceasefire in the trade war after the high-stakes talks.

Trump will leave tariffs on $200 billion worth of Chinese imports at 10% at the beginning of the new year, agreeing to not raise them to 25% “at this time,” the White House said in a statement.

The two leaders also agreed to immediately begin talks on structural changes in terms of forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions, and cyber theft, services and agriculture, the White House said.

However, truce talks were severely affected after Huawei CFO Meng Wanzhou was arrested in Canada on behalf of the US. Although Meng was freed on $7.5 million bail, the arrest came as a severe threat to ceasefire talks. It now seems that Canada might be suffering from consequences after China detained three Canadians seemingly due to Meng’s arrest.  

Also read: US-China trade talks under fire after Huawei CFO Meng Wanzhou arrested in Canada

Cryptocurrencies falling prices

Bitcoin’s price continued to plunge in 2018 as it fell another 7% in November. A 14% reduction in the price of the world’s biggest cryptocurrency saw bitcoin fall to levels of $5,000 for the first time in 13 months.

Also read: Is it going to be downhill from here? A look into the recent fall of cryptocurrencies

Bitcoin’s prices have fallen by more than 80% since it reached an all-time high at approximately $20,000 in December 2017. XRP and Ether, the second and third-largest virtual currencies respectively, were also down by roughly 90% since their record highs.

The cryptocurrency industry has now lost more than $670 billion in value after a peak in January, according to data from It seems that volatility has returned to cryptocurrencies, with the largest tokens shedding billions in market value since the hard fork of Bitcoin Cash debuted last week.

Elton Gomes is a staff writer at Qrius