Counting the costs of the lira’s failed defence

PREDAWN POLICE operations in Turkey are nothing new, but some still raise eyebrows. Under the cover of darkness on April 13th, police officers across the country took down giant banners hanging from offices of Turkey’s main opposition party, the Republican People’s Party (CHP). “Where is the $128bn?” the offending signs read.

The $128bn is the amount of foreign-currency reserves bankers and analysts reckon has been squandered by Turkey’s central bank in its attempt to prop up the lira over the past couple of years. (Comprehensive official figures are not published.) The government, headed by Recep Tayyip Erdogan, has little to show for the policy, thought to be spearheaded by Mr Erdogan’s son-in-law, a former finance minister. Since the start of 2019, when the interventions began, the lira has lost over 35% against the dollar, the result of inflation, low real interest rates and a string of political crises.

Prosecutors ordered the banners be taken down, claiming they insulted the president, a crime punishable by up to four years in prison. One official said they violated covid-19 restrictions. But all this only heightened the controversy. “Where is the $128bn?” lit up social media. On April 21st Mr Erdogan conceded that the central bank had used its reserves to defend the lira, that it might do so again if needed and that the amount spent, including some other items, was in fact $165bn. Markets shuddered.

The money has not vanished. To relieve the pressure on the currency, the central bank exchanged some of its dollars for lira through state banks. But this incurred staggering costs. Given the lira’s depreciation over time, the trades have generated losses of about 250bn lira ($30bn), equivalent to 4% of GDP, calculates Kerim Rota, a former banker and member of a new opposition party. That raises several questions, he says: “why did they start such a silly process, why wasn’t it transparent, and who ordered the banks to sell foreign currency and at what rates?” The government has not provided compelling answers.

With its reserves eroded, the central bank might not be able to defend the lira for much longer. And the currency is under pressure again. After a strong start to the year, the lira resumed its descent after Mr Erdogan sacked the former central-bank governor, a respected policy hawk, and replaced him with Sahap Kavcioglu, a critic of high interest rates.

The former governor reportedly got under Mr Erdogan’s skin after ordering an internal probe into the central bank’s dollar sales. His successor has defended the policy, saying it prevented further lira depreciation. Mr Kavcioglu was already expected to slash rates in the second half of the year. Mr Erdogan may lean on him to do so even earlier to offset the damage to the economy from the pandemic. After a record spike in cases, the government announced a three-week lockdown starting on April 29th.

The lira’s decline has eaten away at Turks’ purchasing power, forcing many to turn to the greenback. (Turkish residents keep more of their savings in dollars than in lira.) But the lack of confidence in the management of the country’s finances has had other effects, including a boom in cryptocurrency trading. Between the start of February and March 24th trading volumes in Turkey reached 218bn lira, up by 3,000% on the same period last year, according to Reuters. Holders have suffered a double shock. The first came when the central bank banned the use of cryptocurrencies as payment. The second was the collapse of two Turkish crypto-exchanges in a single week. One of their founders is thought to have fled to Albania with $2bn in investors’ assets. They too will be asking where their money has gone.