The Central Bank’s forex selling of $6 billion
One of the distinguishing features of Murat Çetinkaya, appointed governor of Turkey’s Central Bank in April 2016, was that he had little intention to intervene in foreign exchange markets by selling foreign currency.
If the Bank uses its tools sufficiently to protect the value of its money, this stance is right. Still, selling foreign currency is not necessarily a mistaken policy, it is just one of the legitimate tools that a Central Bank can use.
But we have seen that Turkey’s Central Bank has chosen not to sell foreign exchange, while also essentially avoiding using interest rates in an appropriate way. Since April 2016, forex selling tenders have not been held, while the Central Bank has also steered clear of increasing interest rates in a sufficient manner.
On the other hand, in 2017 the Central Bank had a policy that made it possible for rediscount credits to be provided to exporters and for foreign exchange earning services to be repaid in Turkish Liras. This way, the expected inflow of foreign currency was avoided, and this eventually meant the selling of foreign exchange.
The window of this implementation was opened from February to May 2017. Companies that owed foreign currency to the Central Bank were offered repayment based on the USD/TL exchange rate of 3.53. Over the course of two-and-a-half months, credits amounting to $3 billion were repaid, though officials did not announce how many repayments were made in liras in May.
A second window was opened in November 2017, with the Central Bank announcing that from Nov. 6 to Feb. 1, 2018 it would be possible for companies to undertake their repayments based on the USD/TL exchange rate of 3.70. This is still in effect today.
According to Central Bank data, the repayments undertaken in foreign exchange amounted to $348 million in November and $282 million in December.
When it is taken into account that foreign exchange repayments amounted to $1.8 billion on average per month during the three month period from August to October 2017, we calculate that the total amount paid to the Central Bank in November and December for the repayment of rediscount credits in liras is roughly $3 billion. So of the amount that should have been paid to the Central Bank, $3 billion has been paid in liras.
So if we take into account that the USD/TL foreign exchange was around 3.78-3.92 in November and 3.76-3.79 in December, we see that the Central Bank offered an “exchange rate treat” amounting to roughly 350 million liras.
Through these windows at the beginning and end of 2017, the Central Bank waived an inflow of $6 billion in foreign exchange and took it in as liras. Technically, this is called “covered foreign exchange selling.”
The acceptance of the fact that foreign currency-earning exporters or foreign currency-acquiring tourism professionals cannot meet their foreign currency debt obligations (because of their loans) in foreign currencies likely indicates many deep problems. Either those who have obtained this credit face difficulty in repayments or they must have exchanged their foreign currency income in other banks.
The Central Bank’s thinking may have been guided by the idea that because companies have liras in hand but cannot come up with foreign currency, they should be allowed to not buy foreign currency from the market and instead bring it to the Central Bank, thereby unbalancing foreign exchange rate stability.” But in that case the same exchange rate should also have been used in the renewal of the credit. We do not know if this happened.
Otherwise, it is obvious that a firm that has paid off its debt at the USD/TL exchange rate of 3.70 (i.e. bought foreign currency), but taken out a new loan at the exchange rate of 3.85 (i.e. sold foreign currency), has been given a considerable foreign exchange gain through these Central Bank measures.
The Central Bank’s provision of an opportunity for companies to pay off their loan at the 3.53 exchange rate at the start of 2017 - and at the 3.70 exchange rate from the end of 2017 to Feb. 1, 2018 – effectively means “cheap foreign currency selling,” which provides an arbitrage profit to some sections.
The amount of rediscount credits provided by the Central Bank in this way amounts to roughly $12 billion.