Turkey Institutes Policy to Bolster Foreign Exchange Reserves

On April 15, the Central Bank of the Republic of Turkey instituted a new policy pursuant to which Turkish exporters will be required to sell 40% of their foreign currency revenues to the Central Bank. Reuters reports that a 50% threshold is being considered, although no such policy is instituted as of yet.

This is an increase from the 25% that was mandated in January, with the purpose of bolstering Turkey’s foreign exchange reserves, which were depleted during the lira crisis of 2021. In January, the Central Bank held only $7.55 billion of net foreign currency, a record low. The policy appears to be paying off, as the number is now approximately $18.30 billion.

As a reminder, the Turkish lira was the worst-performing currency of 2021 and lost 44% of its value. The lira crisis was in part spurred by Turkey’s current account deficit and President Recep Tayyip Erdogan's policies on combating high inflation.

Namely, Turkey has experienced high inflation rates since 2018. The prevalent economic theory is that inflation can be combated with higher interest rates. Contrary to this position, President Erdogan believes that high rates cause inflation and has pressured the Central Bank, on multiple instances, to keep the interest rates relatively low.

Speaking at an event organized by the Turkish Union of Chambers and Commodity Exchanges in 2018, President Erdogan is quoted as saying “My belief is that interest rates are the mother of all evils. Interest rates are the cause of inflation. Inflation is a result, not a cause. We need to push down interest rates.”

Even in 2022, as annual inflation is estimated to rise above 61%, the Central Bank of the Republic of Turkey is maintaining its benchmark interest rate policy low – at 14% for the fourth month in a row.

The Turkish lira has been relatively stable for the last few months and the mandate is increasing Turkey’s foreign exchange reserves. However, inflation is still high and rising dramatically, and some experts are not convinced about the long-term stability of the lira.

Jakob Ekholdt Christensen, head of international macro and emerging markets research of the Danske Bank stated “. . . But with inflation running significantly above target with the Fed tightening and putting pressure on the refinancing of Turkey dollar loans and higher oil prices . . . I’m not so confident that the stability they’ve seen in the Turkish lira for the past months can be maintained,” according to Reuters.

We will keep you updated on the changing situation with the Turkish lira in the following months.