It was reported last week in various news outlets and social media accounts that “Huge amounts of Turkish Lira” have been sent to the regions under the control of the Turkish Armed Forces (TSK) in Syria. In related photographs, there were plenty of 1 lira coins and Turkish lira banknotes of various denominations. While several local sources said “They would be using Turkish Liras,” the decision to pay salaries with Turkish Liras was announced by jihadist organizations in the conflict zone. 

It is understood that HTS, Hayat Tahrir al-Sham, which is also recognized as a terrorist organization by Turkey, has decided to set its 2020 salaries in U.S. dollars. But, since there are no small banknotes available, the equivalent payment will be made with another currency. HTS is reigning in the Idlib region and the general financial director of their “Salvation Government” Ibrahim al-Ibrahim said salary payments in Idlib would be made in Turkish Liras. “Since the decline of the Syrian Lira is continuing, our government has started paying the salaries in Turkish Liras to fulfill the wish of our staff who do not want to be paid in Syrian Liras,” he added. 

A truly interesting situation has occurred. In Syria where civil war has been going on since 2011, all of a sudden, the usage of the Turkish lira has been opted. 

Could it be that Ankara is trying to create a “Turkish Lira dominant zone” economically? Is this an orchestrated step? 

The fact that first caught my attention was that the banknotes that were defined as “plenty of” in the photographs were mostly small ones, like 5, 10 and 20 lira ones. 

The key development that created this situation is that the Syrian Lira (SYP) has rapidly lost value recently. 

The dollar exchange rate course of the Syrian lira is as such: In the period from the new year of 2019 to November 2019, it gradually climbed from 500 SYP to 675 SYP. From November to mid-January 2020, it passed the 1,000 SYP level. Then the Damascus administration introduced a type of capital restriction, banning any other currency but the SYP in payments and commercial transactions. Heavy jail sentences and fines were imposed.  

Devastating devaluation

While the dollar exchange rate at the beginning of the year was 915 SYP, until the end of May, with an average of 20 percent increase monthly, it reached 1,800 SYP level. The exchange rate climb continued sharply and on June 8, with a 76 percent hike, it reached 3,170 SYP level. Compared to the beginning of the year, this means an increase of 250 percent in five months. In other words, it is a devastating devaluation.   

The climb in the forex rate was very sharp in May and in the first week of June. Prices of staple food products also showed the same acceleration. According to the prices posted in the website of ACU, which is a Syrian humanitarian organization, the price of flour increased 50 percent from the new year to the end of April. At the end of May, total increase was 94 percent. A similar rise is also true for bread and sugar. While the prices of bread and sugar had increased 39 percent by April, at the end of May, the increase was 80 percent and 102 percent respectively. Meat and vegetable oil have a similar pattern.

When basic food prices are reviewed, it can be seen that in the past year prices have tripled. For instance, 1 kilogram of meat was 3,908 SYP in May 2019. When it was the end of May 2020, it was 11,180 SYP. On the first week of June, prices were further hiked, adding to the already miserable conditions of the Syrian people. 

In a place where the currency rapidly loses value and confidence, escape from that currency accelerates. Economic units prefer another currency relatively stable and more reliant. In the region in Syria controlled by the jihadists, when also the shrinkage of trade channels with the Syrian regime due to latest development are taken into consideration, then it is just normal that there is a rush to get rid of the Syrian Liras at hand.  

Technical restrictions imposed on the exit from the Syrian Lira are probably effective also. For instance, while the price to be paid for a unit of a product has doubled at the end of May, probably the amount of SYP banknotes for them had not increased. Even just because of this reason, the circulation of another currency that has smaller banknotes is out of practicality and functionality. 

Bad money vs good 

The question is this: Why did the jihadists used the Syrian Lira up to now, the currency of the country that they have been leading a war against for almost 10 years? The salaries of the same jihadists were paid in Syrian liras, but they converted to dollars at the beginning of 2020. 

Well, why did they not use the dollar, the euro or any other currency, but the Syrian Lira for years? 

There are two reasons for this. First is the Gresham Law, the second is technical difficulties. The first one, the Gresham Law states that “Bad money drives out good.” When you are spending, you use the bad money. When you want to keep the value of your fortune, you hold the good money. 

For a different, foreign currency to spread to the “capillaries” of the economy, small banknotes should be widespread. It is very obvious that this is not possible in Syria for the dollar or the euro.  

There is no doubt that in that region or in entire Syria, while individuals are spending in Syrian Liras, they are holding dollars or euros to protect their own economic assets. Most likely, they are keeping relatively large denomination banknotes of dollars or euros. 

Local people trapped in a small area in Idlib and its environment where commercial/monetary flows are very restricted, wish to convert to Turkish Liras in the face of high devaluation and accelerating inflation.  

Most probably, while the Syrian Lira will continue to be used in daily trade, the Turkish Lira will be preferred for the short term both in terms of transactions and storing the value.  

The currency of the country where goods are coming from, that is Turkey, will be circulating more after small banknotes are transferred. 

The usage of dollars in daily trade is not possible because of the preference to “hold the good money,” and because of technical reasons. The amount of small dollar banknotes (1,5,10) to be used in trade and transactions is not adequate and widespread, which is an important reason why it has not been able to settle in daily usage.  

Another factor is the practical conveniences brought by payments in Turkish Liras of logistic, food and personnel payments of supported groups, all associated with the military presence of Turkey in the region.   

It might be that Turkish authorities, while they are making their payments with 100 and 200 lira banknotes, for the Turkish lira to be easily circulated and accepted in trade, also keep 1 lira coins and 5,10,20 lira banknotes. 

Turkish Lira for short term  

In this case, if goods are coming from Turkey to the region, then it is not surprising that the Turkish Lira is preferred. If expenses and payments are to be made with Turkish Liras, then those people who earn this money would have to do their daily spending also with Turkish Liras. The basic argument of the side that is expected to accept Turkish Liras in exchange for a service or a commodity would be, for instance, in a spending done with 50 Turkish liras, there would be the change problem. This seems to have been solved by sending abundance of small change there.  

From the perspective of functionality, the Turkish Lira would be preferred as a tool for transactions in the short term. We do not know whether it would be preferred for saving. Even though, domestically, it has been argued that the Turkish Lira should be saved and kept, but it is a known fact that it has lost value in a very short time. In time, both the value loss of the Turkish Lira and when inflation will reach Idlib eventually through the channel of prices of goods, the probability for the Turkish Lira to be the good money will move away.  

However, it is perfectly normal that while the Syrian Lira is losing its value while it is in the pocket, a relatively stable Turkish Lira is preferred.

There is also the “storing the value” advantage. 

The financial value carried with a single 100 US dollars is approximately 300,000 Syrian Liras. This can only be reached and held with 150 pieces of 2,000 Syrian Lira banknotes. This corresponds to four pieces of banknotes in Turkish Liras.    

For the Turkish Lira to dominate, it is important that economic units in that region hold the Turkish Lira rather than use it. If TL is spent but not stored, then at the end of the day, it will be that only the “bad money” has changed from one currency to another one.   

It is because of this that the Gresham Law should always be kept in mind: Bad money drives out good. The money that is sought for is the good money. While spending, you may use the bad money and get rid of it, while saving, storing and keeping the fortune, you opt for good money.

Now, bad money Syrian Lira is keeping its place while the relatively good money the Turkish Lira has entered the game besides the dollar. The real result will depend on what the trend of those who made this preference will be in the medium term. Will bad money switch to another bad money, or will the Turkish Lira become the good money of North Syria?

My opinion is that a currency, that is losing value and is not the good money to its own citizens, cannot be the good money of another country. Most probably those who declared they have switched to the Turkish Lira will be doing their payments in Turkish Liras and – even if it may be only a few pennies – they will keep dollars to store the value of their accumulation. At most, at the end, the Turkish Lira will be processed indexed to the dollar.