Turkish Central Bank Chief Defends Policies That Sapped Reserves

Turkey’s new central bank governor defended unannounced foreign-exchange sales in recent years that are estimated to have cost the country more than $100 billion in reserves.

The lira’s depreciation could have gotten out of control and borrowing costs would have soared if authorities hadn’t intervened last year, Sahap Kavcioglu said in an interview with state broadcaster TRT on Friday.

The governor used his first television interview since taking office to defend FX sales by state banks, which opposition parties say cost Turkey about $128 billion and still failed to stabilize the lira. President Recep Tayyip Erdogan countered by saying authorities in fact sold $165 billion in a necessary move to finance a current-account deficit and offset capital outflows.

“You need to meet the FX demand of last year,” Kavcioglu said. “If you don’t, Turkey would have to face the consequences.” He cited corporate bankruptcies during a financial crisis two decades ago as examples of how bad things could get.

Diminishing Reserves

Opposition parties put the blame for the drop in reserves on Berat Albayrak, Erdogan’s son-in-law who served as the Treasury and Finance Minister for more than two years until stepping down in November.

Kavcioglu said reserve policies have been in use since 2017 when a protocol signed between the central bank and the Treasury enabled such unannounced foreign-currency interventions.

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

Turkey maintained heavy foreign currency selling as the lira weakened ahead of municipal elections that month, continuing through a rerun of the ballot in Istanbul which Erdogan’s AK Party lost.

Geopolitical tensions with the U.S. later that year battered the currency while unannounced interventions continued well into 2020 and came to a halt with Albayrak’s departure.

Turkey’s total gross reserves, including gold and money held by the central bank on behalf of commercial lenders, have dropped more than 15% from the start of 2020 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.

With the swaps stripped out, net reserves fall below zero, according to Bloomberg calculations.

Governor Firings

Kavcioglu is the fourth central bank governor since 2018 after Erdogan fired three predecessors using extended powers he gained in the executive presidential system he pushed through a referendum four years ago.

The governor reiterated he isn’t on a mission to cut interest rates and said Turkey would continue to offer a positive real rate when adjusted for inflation and maintain a tight policy until the 5% inflation target is achieved.

Kavcioglu said he nonetheless dropped the central bank’s pledge for tight policy for an extended period from the rates decision statement because such language could create unease among businesses.

©2021 Bloomberg L.P.

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