How $75 billion disappeared from Turkey’s central bank

Turkey’s economic decline, culminating in the severe economic crisis that struck the country in 2018, has run in parallel with the political instability that the country has faced since anti-government protests broke out in 2013.

In May 2013, just before protests began in Istanbul’s Gezi Park, the gross foreign currency reserves held by Turkey’s central bank stood at a record-breaking $135 billion. The funds deposited by the Turkish public made up only 20 percent of that total, meaning that the share of the reserves that were effectively borrowed from citizens was extremely low.

On Saturday, the central bank announced that its gross foreign currency reserves would rise by $2.9 billion through an increase in reserve requirements on deposits, taking total reserves to almost $108 billion. But half of those gross reserves now come from citizens’ foreign currency deposit accounts. If we add the $22 billion in cross-currency swaps held by the central bank – such swaps did not exist back in 2013 - to the foreign currency deposits, we see that around $75 billion, or 70 percent of total reserves, now come from non-government resources.

Therefore, we see that foreign currency reserves in Turkey have not only declined, but the amount of borrowing used to fund those reserves has spiked dramatically.

So, what do these figures tell us?

A country’s foreign currency reserves are its ultimate source of cash, and the central bank is the teller. Losing $75 billion of hard currency in six years shows that the country has been taking money out of the pockets of its citizens in order to shore up its finances.

Secondly, several important developments have led to this worsening in the quality of reserves. They include migration out of Turkey, foreigners withdrawing their investments from the country and the closure of several important businesses. These events are all caused by the political turmoil that Turkey has experienced in recent years. Other problems such as inflation and unemployment have also arisen.

The decline in the Turkish central banks’ reserves and the change in their makeup also came after the U.S. Federal Reserve announced that it would reduce the amount of dollars circulating in the market. However, the balance sheet of the FED or other major central banks has not deteriorated like it has in Turkey. There is even an increase in the amount of foreign exchange kept by many central banks around the world.

This tells us that international developments are not the cause of the decline in foreign exchange reserves at Turkey’s central bank. Since the source of the problems are not external, they must be domestic.

Political tensions, the deterioration in the rule of law and the decline in democracy has cost Turkey dearly. What makes this an even bigger misfortune is that the costs are also in hard currency.

Here’s hoping that 2020 will be unlike the previous one: Happy New Year.