$5.5 billion eroded in one week in Turkey

Last week, when the U.S. dollar rose to a record high, the Turkish Central Bank’s foreign currency and gold reserves eroded exactly $5.5 billion. They fell back to $117.5 billion, which is the highest drop since 2009 in the foreign exchange reserves, which are released on a weekly basis.

This drop is related to the fall in the foreign currency accounts of banks held in the Central Bank. Why is that? Obviously, this may be because of banks’ need for foreign currency liquidity. This comes in parallel with another development: The fall in people’s foreign currency deposit accounts is continuing. From July 15 to Nov. 11, foreign currency accounts (DTH) in banks in Turkey fell by 10 percent, or $17.3 billion. Meanwhile, the foreign exchange rate continues to rise. 

Politicians explained the first month of the drop in DTH after the July 15 coup attempt by saying citizens had tried to help curb the foreign exchange rate by selling their foreign currencies. But it is not right to endow citizens with responsibility for the state’s economic policies and defending foreign exchange rates. Are we now going to say that citizens are not doing their job properly because today the fall in foreign currency accounts continues and the rise in exchange rates continues. Most recently, from when Moody’s cut our credit rating on Sept. 23 to Nov. 11, the DTH decreased by $8.7 billion while the exchange rate increased by 9 percent. 

Development Minister Lütfü Elvan recently said in a statement that citizens should trust the Turkish Lira. “We have seen in recent days that our citizens are not selling foreign currency in the market; instead they are keeping hold of it. We also see that the buying of foreign currency has increased. This is completely wrong. Our citizens can easily sell their foreign currency,” Elvan said. 

I wonder where the minister gets his information. The records show a fall. Which one is right?   

A critical question is whether the exchange rate is actually pushed up by withdrawing foreign currency from the banking system or withdrawing foreign currency by transferring it abroad, instead of selling it?  

There are three sources of the drop in foreign currency accounts: The first is the conversion of the DTHs into liras, in other words foreign currency exchange. The second is the swap transactions against the Turkish Lira (this is registered as foreign currency, and any drop or increase is reflected as DTH in records). The third is the withdrawal of foreign currencies from accounts and moving them outside the banking system (in other words putting the foreign currencies under pillows or in safes, or transferring them to bank accounts abroad). 

If the first and third factors affect banks’ foreign currency accounts, then banks lose their foreign currency liquidity. The shrinking of the foreign currency supply pushes rates upward. 

The drop in banks’ required foreign currency reserves in the Central Bank amounts to $15 billion in the same period. Foreign exchange rates are not only affected by transactions against the Turkish Lira in domestic banks’ foreign currency accounts; they are also affected by transactions among the banks themselves as well as the transactions with banks or institutions abroad. 

It is apparent that foreign currency liquidity in all three of these lanes is dropping. The foreign exchange rate is rising, while banks are withdrawing their foreign currencies from the Central Bank.