P.REDAWN POLICE Surgery in Turkey is nothing new, but some still raise eyebrows. Under cover of darkness on April 13, police officers across the country removed huge banners that were hanging on the offices of Turkey’s main opposition party, the Republican People’s Party (CHP). “Where’s the $ 128 billion?” read the offensive signs.
The $ 128 billion is the amount of foreign exchange reserves that bankers and analysts have squandered on Turkey’s central bank in recent years to prop up the lira. (Full official figures are not released.) The government, led by Recep Tayyip Erdogan, has little to show for the policies led by Erdogan’s son-in-law, a former finance minister. Since early 2019, when the interventions began, the lira has lost over 35% against the dollar, driven by inflation, low real interest rates and a series of political crises.
Prosecutors ordered the banners to be removed, claiming they insulted the president, a crime that can be punished with up to four years in prison. An official said they violated Covid-19 restrictions. But all of this only exacerbated the controversy. “Where’s the $ 128 billion?” illuminated social media. On April 21, Mr Erdogan admitted that the central bank had used its reserves to defend the lira, that it could do so again if necessary, and that the amount spent, including some other items, was in fact $ 165 billion. The markets shuddered.
The money hasn’t gone away. In order to reduce the pressure on the currency, the central bank exchanged part of its dollars for lira through state banks. However, this resulted in a staggering cost. Given the lira’s depreciation over time, the deals have resulted in losses of around 250 billion liras ($ 30 billion), which is 4% of GDPcalculates Kerim Rota, a former banker and member of a new opposition party. That raises several questions, he says: “Why did you initiate such a stupid process, why was it not transparent and who ordered the banks to sell foreign currency at what rates?” The government has not given convincing answers.
With reserves eroded, the central bank may not be able to defend the lira much longer. And the currency is under pressure again. After a strong start to the year, the lira resumed its decline after Mr Erdogan sacked former central bank governor, a respected political hawk, and replaced him with Sahap Kavcioglu, a critic of high interest rates.
The former governor got under the skin of Mr Erdogan after ordering an internal investigation into dollar sales by the central bank. His successor has defended the policy and said it would prevent a further devaluation of the lira. Mr. Kavcioglu should cut interest rates in the second half of the year. Mr Erdogan could lean on him even sooner to offset the economic damage caused by the pandemic. After a record spike in some cases, the government announced a three-week lockdown beginning April 29.
The decline of the lira has eroded the purchasing power of the Turks and forced many to turn to the greenback. (Turkish residents keep more of their savings in dollars than in liras.) However, the lack of confidence in managing the country’s finances had other implications, including a boom in cryptocurrency trading. Between the beginning of February and March 24, the volume of trade in Turkey reached 218 billion lira, according to Reuters, an increase of 3,000% over the same period last year. The owners have suffered a double shock. The first came when the central bank banned the use of cryptocurrencies as a means of payment. The second was the collapse of two Turkish crypto exchanges in a week. One of its founders is said to have fled to Albania with investing assets of USD 2 billion. They too will ask where their money went.
This article appeared in the Finance & Economics section of the print edition under the heading “Money for nothing”.