Chronic decline in Turkey’s forex reserves…

Chronic decline in Turkey’s forex reserves…

Following the conclusion of the elections this June, foreign exchange reserves of Turkish Central Bank have been increasing, albeit rather slowly, as stated by Minister Şimşek. However, the recently released data revealed that in the week of 28 July, the net assets of the Central Bank fell to a negative 50 billion dollars again. But apparently its recent efforts to accumulate reserves have not been as effective as they thought it would be in the midst of a foreign currency crisis. Although the CBRT seems to be determined to grow their foreign exchange reserves, it sometimes has to use them to create money without printing it, sometimes to meet the foreign currency needs of government agencies organisations, and sometimes to pay off currency swaps.

If the CBRT had sufficient reserves, its interventions would be interpreted as follows:


– The CBRT buys foreign currency = apparently, it is trying to prevent the overvaluing of the lira.

– The CBRT sells foreign currency = apparently, it is trying to prevent the rapid depreciation of the lira. However, this is not the case. Because the central bank sells foreign currency due to the senseless war it waged against the market, whereas it should buy it for a much lower price, it is left with no option but to manage reserves at current levels.

Considering the government deficit, current account deficit, high inflation and low interest rates, the public sees that trying to keep exchange rates under control in violation of the market realities will lead exchange rates to increase even further in the future. That’s why the KKM has become a very popular financial instrument in the first place. Thinking that, “We are making money no matter what, so there is no need to hold foreign currency”, the depositors, who create a severe lira burden on the Central Bank in exchange for foreign currency, do buy some foreign currency when maturity comes due. They even withdraw some of it in cash and put it under the mattress.

Sometimes people interpret this situation as a decline in the number of foreign currency accounts. In fact, this interpretation can be easily confirmed based on the movements in money supply. But, instead of doing this, they prefer the convenience of interpreting the economy from the comfort of their couch.

There is a tremendous money movement. New KKM accounts are opened and the due ones are closed every day. Due to this tedious task that exhausts private banks, some changes were made to the terms and conditions from opening a KKM account. The banks either offer low interest or one that is slightly higher as a result of a negotiation between the branch and the head office. One reason for this is the required reserve ratio of 15%. Banks do not offer high interest to TRY deposits and try to turn the funding cost and composition in their advantage.

On the other hand, many real sector representatives say that banks are constantly calling them for credit limit increase. Evidently, financial institutions think that lending terms will be loosened in the autumn.

What I have written above so far has nothing to do with market balance, supply and demand, liberal economy. Because everyone, especially government institutions and the Central Bank, takes positions according to political advantage or influence vis-à-vis credit terms and economic activity. Since the exact roadmap is not known, and just like driving in fog, everyone acts on their instincts as well as on the not-too-reliable information from contacts involved in political circles.

I sincerely congratulate everyone capable of keeping their organisations, strategies and dreams alive in such a challenging environment.