The low dollar TL rate target of Central Bank and its contribution to Turkey’s economy

Turkey’s Central Bank has managed to pull US dollar below 7TL level. This is presented as great success by some authorities. However, the actual picture does not seem to be like this at all. Although official dollar rate is around 7 TL at the moment the actual rate in the free market is around 12 TL. This is how businesses calculate dollar when they make their plans. In fact, this is the rate taken into consideration regarding pricing calculations made for giant BOT projects such as Marmararay, Istanbul Airport etc

What is happening currently is as follows:

Turkey is badly in need of fresh foreign currency, that is US dollars. The Central Bank literally consumed its dollar reserves during the service of former Treasury Minister and needs to find fresh funds. However, she has been experiencing difficulties trying to find loans in international markets. To be even worse she has to bear with very high interest rates even when it does manage to find such funds.

On the other hand, locals in Turkey have a huge amount of deposits in US dollars in Turkey’s banks. The amount is said to be around USD 230 billion which is certainly a crazy figure. Why? The reason is locals unluckily have more confidence in US dollar as compared to Turkish Lira. They prefer to keep their small (or big) savings in US dollar.

The Central Bank has adopted the strategy which is “trying to push locals who keep their savings in foreign currency, to sell their dollars so the Bank can buy those savings and fill its reserves again.”

The question at this point is; “How is this supposed to work?”

As the bank has preferred to sky-rocket the interest rates, new dollars have come into the country. Well, experts say the amount is around USD 15-20 billion so far which has helped the bank to take care of a few issues obviously – Not to forget, this is as they call it HOT Money which can leave any minute. It has nothing to do with investment in the industry or economy of the country.

So, what happens is foreign fund holders who have thus brought money into the country manage to make incredible short term profits in TL thanks to very high interest rates. In addition, when they get their dollars back to leave Turkey again, they receive more dollars than the amount they have brought into the country in the first place, because they can likely receive dollars at a lower exchange rate as compared to the rate they used at the time they came into the country. This way, foreign fund holders manage to make double profits – that they would not be able to see anywhere else in markets.

When there is an abundance of dollars in the market, the dollar TL rate goes down – as is the case currently. However on the contrary to the plan, residents prefer to buy dollars at a low exchange rate, rather than selling their dollars, because the exchange rate has fallen and they consider it a good time to buy more dollars – rather than sell them. So the mechanism works exactly the opposite to what is originally planned. In other words, the Central Bank cannot still manage to fill its reserves by buying from locals.

Right at this point the question would be: Does this help the Turkish economy at all?

=> First of all, Turkey has to pay incredible amounts of interest to foreign fund holders who bring their money into the country for a short term only. A great loss for the country, that is.

=> Secondly, does this operation do any good for the inflation and all? No it has not contributed in the least so far and experts say it won’t in the long run, either.

=> However the worst part is; “Because the Central Bank has raised interest rates excessively, many businesses have been experiencing incredibly difficult situations, and all sectors, including exports and construction are losing hopes more and more each day.”

=> Last but not the least, experts say “as the financial authority will not be able to maintain and/or keep balance in several financial aspects such as the budget, the reserves needed to pay foreign debts, it is evenutally bound to lift the pressure on financial markets by reducing the interest rates – after which US Dollar TL rates may very likely experience another hike and even a major one this time”.

So, at the end of the day the picture above might give us an idea about if the “SUCCESS” of having brought down the dollar to 7 TL level by the high interest rate policy of the Central bank contributes to Turkey’s economy or not.

For those interested  to have an opinion 🙂

Note: This information and opinions are based on several articles and observation shared by opinion leaders who are known to be experts in the field of economy.