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Turkey’s central bank chief defends policies that have undermined reserves

By on April 23, 2021 0

Turkey’s new central bank governor has defended unexpected currency sales in recent years that are believed to have cost the country more than $ 100 billion in reserves.

The lira’s depreciation could have spiraled out of control and borrowing costs would have skyrocketed if the authorities had not intervened last year, Sahap Kavcioglu said in an interview with state broadcaster TRT on Friday.

The governor used his first TV interview since taking office to defend the currency sales of state banks, which opposition parties say are costing Turkey roughly. 128 billion dollars and still has failed to stabilize the lira. President Recep Tayyip Erdogan countered by saying that the authorities have in fact sold $ 165 billion to an extent necessary to finance a current account deficit and offset capital outflows.

“You have to meet last year’s foreign exchange demand,” Kavcioglu said. “If you don’t, Turkey will have to face the consequences.” He cited corporate bankruptcies during a financial crisis two decades ago as examples of how things could go wrong.

Decrease in reserves

Opposition parties blamed the declining reserves on Berat Albayrak, Erdogan’s son-in-law who served as treasury and finance minister for more than two years until his resignation in November.

Kavcioglu said the reserve policies had been in effect since 2017, when a protocol signed between the central bank and the Treasury allowed such unannounced foreign currency interventions.

the Turkey’s first significant drop in reserves was reported by Bloomberg in March 2019, when the bank blew more than $ 6 billion in foreign holdings during two weeks of lira volatility.

Turkey maintained strong foreign exchange sales as the lira weakened ahead of that month’s municipal elections, continuing with a resumption of the Istanbul ballot that Erdogan’s AK party lost.

Geopolitical tensions with the United States later that year hit the currency while unannounced interventions continued through 2020 and ended with the departure of Albayrak.

Turkey’s total gross reserves, including gold and silver held by the central bank on behalf of commercial lenders, have fallen more than 15% since the start of 2020 to $ 89.3 billion in April . Net international reserves fell more than 75% to $ 9.9 billion, while money borrowed from banks under short-term swaps reached tens of billions of dollars.

With swaps removed, net reserves fall below zero, according to Bloomberg calculations.

Governor Shots

Kavcioglu is the fourth central bank governor since 2018 after Erdogan sacked three predecessors using sweeping powers he acquired in the executive presidential system he pushed for a referendum four years ago.

The governor reiterated that he was not on a mission to cut interest rates and said that Turkey would continue to offer a positive real rate once adjusted for inflation and would maintain a restrictive policy until the 5% inflation target is achieved.

Turkey says April rate cut shouldn’t be taken for granted (1)

Kavcioglu said he nevertheless abandoned the central bank’s commitment to strict policy for an extended period of the rate decision statement because such language could create unease among businesses.