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Turkey’s central bank sells gold to support diminishing FX reserves amid lira pressure

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Bünyamin Tekin

As Turkey’s central bank struggles to stabilize the lira before May elections, it has resorted to selling gold to support its rapidly diminishing foreign exchange (FX) reserves, according to local media.

The central bank’s gold reserves have been shrinking over the past seven weeks, according to official data, which show a decline of 9 percent during that period.

Between March 3 and April 21, the bank sold 72 tons ($4.7 billion) of gold to shore up reserves, reflecting the urgency with which the bank is trying to maintain the USD-lira exchange rate below 20 lira.

The central bank decided to leave the policy rate unchanged at 8.5 percent on Thursday, citing continued inflation concerns and the lasting impact of February’s devastating earthquakes.

Inflation in Turkey has been on the rise for more than a year, though it may be easing somewhat. The most recent data indicate that annual inflation was 50.51 percent in March, down from 55.2 percent in February.

Economist Hakan Kara, a former chief economist at the central bank, commented on the sale of gold reserves, saying, “It’s possible to say that the central bank has recently been trying to turn gold and physical foreign currency banknotes into liquid reserves.” This implies that the bank is selling gold to support its diminishing reserves.

The Turkish lira has been under pressure as the country approaches presidential and parliamentary elections on May 14. The lira has weakened by 3.1 percent against the dollar since the earthquakes in early February. In response, the central bank has recently begun to accept liras in gold trading transactions to ease pressure on the currency in the spot market.

Turhan Bozkurt, the former business editor at Turkey’s now-closed Zaman daily and a current YouTube influencer with a channel followed by 150,000 focusing on economy-related news, spoke to Turkish Minute about the gold sales and the depletion of FX reserves.

According to Bozkurt, keeping the policy rate at 8.5 percent and the USD-lira exchange rate below 20 liras won’t be sustainable for the long term. He stated that the situation clearly shows that the Turkish Central Bank’s monetary policy is failing to maintain foreign reserves and make foreign reserves available to domestic demand.

“Whoever comes to power after the elections, they must raise the interest rate to at least 25 percent to stabilize the exchange rate,” Bozkurt says. “If they can’t succeed in doing that, I’m afraid the government would have to resort to capital controls to stabilize it.”

Interestingly, in January 2022 former Welfare Party (RP) lawmaker and pro-government Turkish newspaper Yeni Akit writer Şevki Yılmaz criticized the ruling Justice and Development Party (AKP) for not utilizing the country’s gold reserves, which were around 700 tons at the time, to quell the exchange rate crisis. Yılmaz implied at the time that not using that amount of reserves would be foolish.

“The AK Party has to throw [Turkey’s] money [at AKP supporters] before the 2023 elections. We have 700 tons of gold. You say we have this many dollars in the central bank. Are you going to leave it behind for these thieves [future ruling parties]?” Yılmaz said at the time.

In tandem with Yılmaz’s remarks, some economists, such as Dr. Veysel Ulusoy, who writes for the Cumhuriyet daily and teaches economics at Boston College, suggested that the depletion of the country’s gold reserves before elections should be prevented.

The lira’s volatility has jumped ahead of elections scheduled for May 14, where President Recep Tayyip Erdoğan is seeking to extend his two-decade rule by another five years. With less than four weeks until the vote, the Turkish lira’s one-month implied volatility against the dollar surged to the highest since June and the highest in the world at 39 percent.

Turkey’s central bank has been facing criticism for its handling of the forex reserves, and the opposition parties have been demanding explanations about the central bank’s $128 billion in foreign reserves used in 2019-2020.

According to Bloomberg calculations, the central bank intervened in the currency market with another $128 billion in total from December 2021 to March 20, 2023, and the intervention appears to have accelerated in the past month.

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