Can Teoman
Oct 25 2019

Accounting tweak could allow Turkish government to exploit central bank reserves

Turkey’s military operation in northern Syria ended far more swiftly than expected this week, drawing the focus back to Turkey’s deepening economic woes as illustrated by a 2020 budget creaking under vast government spending.

With funding sources running dry the government could turn to an accounting tweak at its central bank that would allow it to make extraordinary use of profit from the bank’s foreign currency reserves.

The Turkish government implemented belt-tightening policies to address lira weakness since a currency crisis struck last year, and this and high interest rates have slowed the economy, reducing tax revenues.

But President Recep Tayyip Erdoğan’s government has been unable to free itself of a centralist mindset that has brought public spending higher as revenues dry up. The 2020 budget announced this month signalled alarm for Turkey’s economy.

Despite a one-off injection of billions of dollars from the central bank’s profits and reserves, the budget deficit reached 86 billion liras ($15 billion) over the first nine months of the year. That figure has now surpassed 100 billion liras, close to 3 percent of Turkey’s GDP.

After two years of costly ventures that have stripped the central bank’s reserves bare, there are serious questions about the viability of the 2020 budget, which has sought to make up the shortfall by raising taxes.

The government has sought unsuccessfully to stimulate growth – and more tax revenues – with campaigns to extend cheap credit, often to the detriment of the banks. With this unlikely to work, the government is seeking another way to pull a rabbit out of the hat and save Turkey’s economy.

Bloomberg reported this week that central bank officials had discussed a new accounting tweak that would allow “the bank to book as income unrealised gains and losses in its so-called revaluation account - accrued due to changes in the market value of its foreign-currency and gold holdings”. This would be counted as profit for the central bank, a portion of which is transferred to the Treasury.

The amendment appears to answer a serious question that was raised after Treasury and Finance Minister Berat Albayrak revealed the new budget this month.

This year’s supplemental appropriations are expected to reach 200 billion liras ($34.9 billion), but that included the one-off 80 billion liras transferred from the central bank.

Markets were right to be sceptical of the supplemental appropriations of 172 billion liras forecast in the 2020 budget, since the government’s sources for one-off appropriations have by now nearly dried up.

Economists said the government would need to do something extraordinary to reach that figure, and the accounting tweak reported by Bloomberg would be one such measure, if adopted.

It would also spell the end of a principle that has held up since the post-crisis IMF programme of 2001 that saw successive governments print liras to match the central bank’s foreign currency reserves.

To a large extent the link between foreign currency and gold reserves and the printing of new lira will be broken if the measure is adopted, leading to the likely dilution of Turkey’s currency.

The ethical dimensions of this are unlikely to pose a problem for the government, but it cannot be ruled out that the move will result in more cash being converted to liras, leading to a slide in the currency.

The amount transferred from the central bank to the Treasury may also cause fluctuations, since there is a direct relationship between the bank’s profits from foreign currencies and gold reserves and their value on the market.

 

 

 

 

 

 

Date                  

Lira value
against dollar     

Central bank
revaluation account (Billion lira)

 

 

 

30-12-2016

3.52

53.8

 

 

 

29-12-2017

3.81

57.0

 

 

 

27-07-2018

4.80

65.5

 

 

 

24-08-2018

5.99

103.8

 

 

 

31-08-2018

6.20

116.7

 

 

 

07-09-2018

6.62

121.8

 

 

 

30-11-2018

5.23

38.7

 

 

 

28-12-2018

5.29

45.1

 

 

 

10-05-2019

6.09

76.7

 

 

 

09-08-2019

5.53

53.4

 

 

 

16-08-2019

5.53

58.6

 

 

 

23-08-2019

5.66

65.2

 

 

 

30-08-2019

5.80

70.2

 

 

 

06-09-2019

5.75

62.3

 

 

 

13-09-2019

5.73

62.0

 

 

 

20-09-2019

5.69

60.4

 

 

 

27-09-2019

5.69

58.2

 

 

 

04-10-2019

5.68

58.9

 

 

 

11-10-2019

5.79

66.2

 

 

 

 

As the table shows, the value of the reserves in the central bank’s revaluations account fluctuates from week to week according to the dollar rate, meaning that the “profit” accessible to the Treasury under the proposed tweak will fluctuate in the same way.

The sum is the revaluation account is also tied to the total foreign currency reserves held by the bank. 

The crucial point in this is determining which trend the government will want the exchange rate to follow. A lira depreciation could bring more income to the budget from the revaluation account, but will doubtless have side effects such as inflation.

However, inflation is already an issue the ruling party has been able to keep in hand due to its tight control of state institutions.

So, it is quite possible that the lira value will fall in the coming year, at least until the fictitious profits can be transferred from the central bank to the budget.

 

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.