Turkish Lira: A curious bit of creative accounting?

Turkey’s central bank continues to defy gravity. Its inert rate-setters held the benchmark interest rate at 14% for the fifth straight month recently, despite worsening inflation and the continuing collapse of the Turkish lira. It remains surprising how markets seem indifferent to bizarre monetary policy from the Turkish central bank.

The country’s monetary policy is inefficient and makes no sense. The central bank has no impact on monetary policy. Its policy rate has no impact on market rates.

However, Turkey’s central bank serves as a lira printing house and as the accounting department of the Erdogan administration.

The press picks up on these inconsistencies. One such article was published by Bloomberg – syndicated to Al Jazeera – on 4 January 2022, written by Cagan Doc:

Mystery surrounds end-of-year windfall for Turkey’s central bank

Turkey’s central bank had penciled in an expected $5.2bn loss on December 30, but managed to end the year $4.4bn in profit

Turkey’s central bank posted an extraordinary daily profit of around $10 billion on the final day of 2021, sparking questions on what caused this overnight boon that will trickle down to the nation’s Treasury.

The monetary authority had penciled in an annual loss of around 70 billion liras ($5.2 billion) on Dec. 30 but ended the year with 60 billion liras of profit, an unprecedented change of fortunes in a single day, according to its daily balance sheet. In February, the Ministry of Treasury and Finance – as the central bank’s biggest stakeholder – will begin collecting much of that sum as dividends.

The abrupt turnaround comes after President Recep Tayyip Erdogan unveiled measures meant to compensate lira investors for any losses. The Turkish currency slid 44% against the dollar last year, largely as the central bank – egged on by Erdogan – slashed its benchmark rate by 500 basis points since September.

The lira’s depreciation has fueled consumer price rises, with inflation ending the year past 36%, the highest level since September 2002. That’s eaten into Erdogan’s popularity as 2023 elections approach. But even with guaranteed returns on lira deposits, Turkish investors are still holding on to foreign currencies, undermining the Turkish leader’s plan to support the lira without raising interest rates.

Erdogan, who has attacked elevated borrowing costs as a brake on economic growth, pledged to remove the “bubble” from inflation in a speech on Tuesday, calling exchange-rate fluctuations and ‘excessive’ price increases ‘thorns’ on Turkey’s path. His policy of cutting rates to bring down inflation goes against mainstream economic thinking.

The central bank declined to comment on the dramatic move on its balance sheet, which was first reported on Monday by the bank’s former deputy governor Ibrahim Turhan and ex-banker Kerim Rota, both members of the opposition Future Party. Two officials familiar with the matter said it was in line with independent auditors’ accounting advice, but asked not to be identified because of the sensitivity of the matter.

According to Turhan, a possible explanation for the sizable overnight profit boost could lie in the sale of foreign-exchange reserves to the Treasury. The lira’s depreciation makes foreign reserves more valuable in local currency, but that can’t be logged in the profit column until the reserves are sold, he said.

The same amount of dollars would then have to be bought back to maintain the reserves level, Turhan said.

The Treasury’s borrowing program for the current three-month period showed authorities were already expecting 44 billion liras in external revenue next month.

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