Despite the high current account deficit and high inflation, the government, which insisted on a low interest rate policy, got into a dead end when it came to foreign exchange. If an attempt is made to keep the exchange rate constant, the reserve problem will grow, and if not, the public budget problem will grow.
While exchange rates, which had been relatively quiet for several months, have risen again in recent days, economists warn that the government is facing a serious standoff.
While the dollar, which has been relatively stable in the 14.50-15.00 range for some time, was seen at 15.51 last night, experts are pointing to risks on the reserve and budget side.
Speaking to Sozcu.com.tr, economist Emrah Lafçı said of the government’s dilemma: “If you hold the dollar, you have to spend the central bank’s reserves. If you don’t hold, you’ll have to pay from the Treasury for currency-protected deposits,” he said.
LOSS OF RESERVES ACCELERATED
In fact, over the past 4 months, the CBRT has sold about $30 billion in implicit reserves to stabilize exchange rates.
In an environment of high current account deficit, high inflation and low interest rates, more reserves need to be issued to keep exchange rates stable, but the CBRT analytical balance sheet data shows that the bank’s net foreign currency position, excluding swaps and Treasury foreign currency deposits, is as of May 10, 2021 approximately -$60.8 billion. This shows that it is close to the observed record lows.
Therefore, the amount of reserves that can be used to hold exchange rates gradually decreases.
IF THE CURRENCY RISES, THE COST OF KKM INCREASES
If reserve sales are reduced or halted and exchange rates are allowed to rise, the cost to the public of currency-hedged deposits (CKM) will increase.
In fact, it is calculated that the cost of KKM, which reached 810 billion TL on April 29, can reach up to 100 billion TL* when the dollar/TL rises to 16 TL.
According to the central government budget expenditure tables released by the General Directorate of Accounting of the Ministry of Finance and Treasury, 11.7 billion TL was paid in March as part of the “expenditure on the protection of deposits and participation accounts against exchange rate increases”.
Taking into account that exchange rate differential payments for KKM started on March 23, TL 11.7 billion was booked as a one-week payment only.
As the exchange rate rises, so does the cost of the KKM to the public.
FORTY MULES OR FORTY LINES?
Lafçı explained the budget and reserve dilemma with the words “forty mules or forty lines” and emphasized that the only person responsible for the current situation is not Finance and Finance Minister Nureddin Nebati, but the consequences of Erdoğan’s policies.
Explaining that there is no exit strategy from the current situation, Lafçı said, “There will be a demand for foreign exchange when the KKM exits. He said: “What is happening in KKM is not all in the same term. If the first ones to come out prefer foreign currencies, the exchange rate difference to be paid to the remaining ones will be much higher,” he said.
Pointing out that managing a country is risk management, Lafçı explained that risks are realized with the war in Ukraine, the rise in energy prices, the Fed’s rate hikes and the dollar index rise, warning: “That’s good days”.
TEMPORARY STABILITY ENDS
The dollar, which exploded with the Central Bank (CBRT) interest rate cuts in September last year, rising from 8.30 to 18.30, has been repatriated through a series of measures, notably reserve sales and KKM.
However, while central banks in developed countries, particularly the US, began tightening monetary policy to curb inflation, despite the high current account deficit and high inflation, the government continued its ultra-loose monetary policy, increasing risks.
Official consumer inflation, which hit 70 percent against the CBRT policy rate of 14 percent, rapid credit growth and the rapidly widening current account deficit also added pressure on exchange rates.
In fact, Turkey’s risk premium (CDS) exceeded 700 points, approaching its peak after the 2008 global economic crisis.
*The invoice belongs to the person who shared on Twitter with the username @e507 in the Finance section.
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