Question Over Forex Reserves Rattles Turkey’s Erdogan


“Where is the $128 billion?” The question, turned into a political slogan by Turkey’s largest opposition party and emblazoned on posters and billboards in Istanbul, has rattled the government of President Recep Tayyip Erdogan.

The Republican People’s Party, known by its Turkish acronym CHP, says the government blew through $128 billion in foreign-exchange reserves over two years — coinciding with the period Erdogan’s son-in-law Berat Albayrak was treasury and finance minister — in a failed attempt to prop up the lira. (Some critics put the figure higher, at $140 billion; Goldman Sachs reportedly estimated it exceeded $100 billion in 2020 alone.)

In a sure sign that the CHP’s campaign has hit home, Erdogan launched a counterattack, saying in a speech on Wednesday that the sum was actually $165 billion, and adding defiantly that reserves could be used “again when needed.” This came after weeks of  angry denials from the president, Albayrak and other top officials, and a clumsy effort to erase the slogan itself

Aside from the political posturing, the government has finally acknowledged that the question needs answering. In a televised interview on Monday, Albayrak’s successor, Lütfi Elvan, allowed that it would be “beneficial” for the central bank to publish the data on foreign-exchange transactions in 2019 and 2020.

If this is a roundabout way of acknowledging that the process was opaque, it is a welcome admission from a government that rarely owns up to its mistakes. It is also an indication that Erdogan is vulnerable to political pressure.

Turkey is the hardly the only country to use its reserves to shore up its currency, but the scale of the sale was eye-watering: Its net international reserves fell by more than 75% since the beginning of last year to just $10 billion in April. At the same time, borrowing from banks under short-term swaps ran into tens of billions of dollars. When money borrowed from local lenders via swaps is stripped out, the net international reserves fall below zero, according to Bloomberg calculations.

The opposition’s allegations are twofold: First, that the policy of selling reserves to strengthen the lira was pursued long after the government knew it wasn’t working, leading to the wastage of billions of dollars; second, that the foreign exchange reserves were sold at lower than market prices to those with political connections.

Elvan denied anything improper had taken place and said the sale of reserves was “completely legal,” backing up the central bank governor, Sahap Kavcioglu, who told the state-run Anadolu Agency that a 2017 protocol gave the Treasury leave to use reserves for the prevention of “unhealthy price formations” and to maintain a supply-demand balance in financial markets. The finance minister suggested that publishing the data would “prevent this being used as political material and to get rid of information pollution.”

If the government follows through on this promise of transparency, the data will be parsed not only by its domestic opponents but also by foreign investors trying to make sense of Erdogan’s handling of the Turkish economy — and specifically, of the institutions that are meant to manage it.

Albayrak’s sudden departure in November came a day after the president sacked Murat Uysal as central bank governor. The two men had presided over the evaporation of foreign-exchange reserves, with little by way of explanation and even less by way of effect: The lira sank to historic lows against the dollar, falling as low as 8.58 last November. (It remains south of 8, a long way from 5.2 at the start of 2019.)   

Uysal’s successor, Naci Agbal, raised interest rates and restored some lost value to the currency, but was fired five months later. The received wisdom is that he fell victim to Erdogan’s unorthodox views about interest rates. But Reuters reported the president had additionally been upset by Agbal’s decision to launch a formal review of the sale of reserves during the Albayrak-Uysal era.

Some officials have suggested that the sale was necessary to protect the Turkish currency from the economic effects of the pandemic; critics point out that the process began long before coronavirus raised its ugly spikes. In his TV interview, Elvan said the central bank had not sold any reserves since November.

In February, when the CHP began to ask the $128 billion question, Albayrak threatened to sue his detractors for defamation. “There is no possibility of any foreign currency or lira resources of the central bank disappearing, evaporating or being transferred to a different location,” his lawyer said in a statement.

Erdogan defended Albayrak, saying that he was being pilloried for being the presidential son-in-law. “There is no such thing as foreign currency evaporating or transactions that are against the law or unethical,” he said.

But this cut no ice with critics like opposition politician Ibrahim Turhan, a former deputy central bank governor and ex-chairman of Borsa Istanbul, who tweeted: “If you spend your reserves to contain the exchange rate but it goes up to 8.5 from 5, then your reserves have evaporated.”

Turks and foreign investors alike would like to know exactly how that happened.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Bobby Ghosh is a Bloomberg Opinion columnist. He writes on foreign affairs, with a special focus on the Middle East and Africa.

©2021 Bloomberg L.P.

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