IMF report shows Turkey below reserve adequacy limit

The International Monetary Fund (IMF)’s Global Financial Stability update released this week has revealed that Turkey is below the reserve adequacy limit.

Turkey has relatively high average external financing requirements but low reserves as a percentage of reserve adequacy, according to a graph in IMF’s update, putting the country below the reserve adequacy limit on a rough par with others such as Egypt, Chile, and South Africa.

In its analysis of foreign currency reserves and financing requirements, the IMF emphasised that countries that need more debt restructuring in the current environment will be taking greater risks because they have to borrow at a higher cost.

The newspaper Sözcü featured some of Altınbaş University professor Hayri Kozanoğlu’s evaluations of the report on Saturday.

"When we consider the components of reserve adequacy and foreign financing requirements together, it is seen that our country has been struggling with foreign currency shortage due to insufficient Central Bank reserves and high outsourcing requirements,” Kozanoğlu said.

Urged on by the government, the central bank has used up tens of billions of dollars of its foreign exchange reserves to prevent the lira from weakening. At the same time, it has slashed interest rates to single digits and to below the annual inflation rate, making lira-denominated assets less attractive.

The slump in the lira is also making it more expensive for Turkey’s government and companies to refinance a pile of short-term foreign currency debt. The country needs to service almost $170 billion over the next 12 months, equating to 24 percent of GDP, Reuters said in May.

Turkey is also heading for a second recession in less than two years – the IMF predicts that the coronavirus will cause an economic contraction of five percent in 2020.