Erdoğan, finance minister defend Albayrak over forex reserves slump

Turkish President Recep Tayyip Erdoğan and his finance minister Lütfi Elvan defended Erdoğan's son-in-law and Elvan's predecessor over a slump in the nation’s foreign currency reserves last year.

Erdoğan and Elvan condemned the main opposition Republican People’s Party (CHP) for taking aim at Berat Albayrak, the former treasury and finance minister who resigned unexpectedly in early November.

The CHP blames Albayrak for using up tens of billions of dollars of the reserves last year in a failed attempt to defend the lira. It has demanded that Albayrak and Erdoğan account for the losses.

Erdoğan said on Monday that the CHP's criticisms amounted to a direct attack upon himself and his family. He praised Albayrak's record on the economy and said he stood ready to take legal action.

"In this period, when global supply chains suffered serious damage, and the global economy, from production to employment, shrunk in all areas, we ensured that our country emerged from the process with the least damage with the fast and effective measures undertook by Mr. Berat," Erdoğan said, according to the state-run Anadolu news agency.

The sales of foreign currency meant that the central bank’s net reserves, minus foreign currency swaps with state-run banks, have declined deeply into negative territory, prompting the central bank to hike interest rates sharply to stabilise the lira and rein in double-digit inflation. IMF reforms in the early 2000s sought to render the decisions of the central bank, including management of foreign currency reserves, independent from the control of ministers.

The lira extended losses against the dollar after Erdoğan spoke, trading down 1.4 percent at 7.05 per dollar as of 4:12 p.m. in Istanbul local time.

Erdoğan and Elvan said there was nothing untoward about the currency operations.

“Under the conditions of the 2020 pandemic, it is unacceptable to distort the foreign exchange reserve transactions carried out in line with the goal of financial stability in an environment necessitated by the extraordinary fluctuations in the global markets,” Elvan said.

Erdoğan and Elvan made no reference to whether the sale of the bank’s foreign currency reserves amounted to political interference on the part of Albayrak and the government.  

Gross foreign currency reserves stood at $93.3 billion at the end of December, according to central bank figures. Ratings agency Fitch said on Friday that the central bank's net reserves totalled $15.3 billion at the start of February and were negative when taking into account currency swaps with state-run banks conducted through most of last year.

Erdoğan is head of the country's sovereign wealth fund, which controls state-run banks Ziraat, Halkbank and Vakıfbank.

Elvan, a former deputy prime minister in Erdoğan's government, was appointed by Erdoğan in early November to replace Albayrak, who resigned in an Instagram post on Nov. 8 and has not made a public appearance since.

Albayrak's policies, which included urging the central bank to keep interest rates low to stimulate economic growth, were much criticised by foreign investors, as well as the political opposition.

Economists have heralded the arrival of Elvan and central bank governor Naci Ağbal, hired by Erdoğan on Nov. 7, as a sign of Turkey’s commitment to responsible monetary and economic policy. Ağbal has since increased interest rates to 17 percent from 10.25 percent to defend the lira, while Elvan has pledged economic reforms for the country, which have yet to be announced.

The slump in Turkey’s foreign currency reserves helped send the lira to a record low against the dollar in early November. The policy, coupled with a decision by former central bank governor Murat Uysal to keep interest rates at below the rate of inflation, had raised concerns for the central bank’s independence from politics.