Turkish Central Banker Opens Up on Using Reserves to Buoy Lira

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Turkey’s new central bank governor shed light on the use of foreign-currency reserves to support the lira over the past two years, as opposition parties step up their criticism of the strategy as wasteful.

Sahap Kavcioglu, installed last month after his predecessor’s abrupt removal, said reserves were utilized under a 2017 protocol with the Treasury to prevent “unhealthy price formations” and maintain a supply-demand balance in financial markets, according to state-run Anadolu Agency.

All foreign-exchange transactions took place at market prices and no organization or institution received “preferential treatment,” Anadolu cited Kavcioglu saying.

Rivals of Turkey’s ruling AK Party are demanding officials explain a drop in foreign reserves during the period that Berat Albayrak, President Recep Tayyip Erdogan’s son-in-law, was treasury and finance Minister.

Global banks including Goldman Sachs predict more than $100 billion of central bank reserves were spent to prevent a disorderly depreciation in the lira last year alone, when the currency came under pressure after a series of large rate cuts in a pandemic-hit economy.

“That money is in this nation’s treasury and the central bank,” Erdogan said last month. “There is nothing lost. Thank God, our foreign currency reserves have started to recover.”

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

When money borrowed from local lenders via swaps is stripped out from net reserves, they fall below zero, according to Bloomberg calculations.

In a written interview after his appointment last month, Kavcioglu said the central bank would maintain its goal of boosting foreign-exchange reserves, and “may use reserve-boosting tools under appropriate conditions.”

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