The Central Bank has almost finished its swap transactions with domestic banks, reduced USD 5 billion from its deposit accounts, which are seen as liabilities on its balance sheet. According to economists, it is now the turn for the swaps made with other countries’ central banks, which do not appear on the balance sheet but are included as a surplus in the reserves.
Turkey turned to domestic and international swaps in response to the reserve depletion caused by foreign exchange sales during the low interest rate policy implemented before the general elections last year and the ‘controlled exchange rate’ period, as economists call it.
The Central Bank lent TRY to domestic banks and received gold and foreign currency in return, and signed swap agreements with other countries’ central banks in local currencies. These two transactions were included in the reserves and made them look better than they were. Yesterday, the Central Bank sent a letter to banks informing them that it would end TRY swap transactions against foreign currency as of today. However, it has USD 23.1 billion in swap agreements with other central banks. Economists emphasize that the Central Bank should end these for a clean and reassuring balance sheet.
Local swaps fall from USD 64.5 billion
The Central Bank has been trying to hold exchange rates by selling from its reserves in an environment of unconventional monetary policy, high inflation and rising exchange rates since 2019. While this effort led to a rapid erosion in foreign exchange reserves, instead of implementing a tight monetary policy, the Central Bank started to ‘make up’ the reserves with domestic and international swap agreements, as economists call it. Due to these swap transactions, economists had to look at the Central Bank’s reserves excluding swaps, because the Central Bank’s real reserve adequacy could not be understood from total or net reserves due to these transactions. In the swap transactions with domestic banks, the Central Bank was giving TRY and buying foreign currency and gold from the banks. These amounts had reached quite high levels. With the new Central Bank and the economic administration’s transition to traditional monetary policy and decisive practices, the Central Bank’s swap stock with domestic banks declined from the 2023 peak of USD 64.5 billion to $144 million. This situation was welcomed positively by both domestic and foreign market experts.
USD 23.1 billion swap with other countries
There is no development in foreign swaps yet. The Central Bank first signed a swap agreement with China, which is renewed every three years. This renewal was last made in June 2021 and the amount was USD 6 billion. Swap agreements worth USD 2 billion were signed with South Korea and USD 15 billion with Qatar, which were renewed for 3 years in December 2021. There is a swap agreement with the United Arab Emirates at the level of USD 5 billion, which was signed in 2022. Although these swap agreements are not seen in the Central Bank’s balance sheet as liabilities or assets, they are included in the reserve account as dollar equivalents. According to the calculation made by the bankers, as of July 12, the swap obligation to the central banks of the country is at USD 23.1 billion, and the TRY equivalent of the transaction is included in the reserve money liabilities as TRY 756 billion. The presence of swap transactions with other central banks in the reserve account, even though they do not appear on the balance sheet, causes the debate on the Central Bank’s reserves. Economists still calculate the reserve adequacy of the Central Bank by using the net reserves excluding swaps. Net reserves excluding swaps have been on a steady upward trend since the local elections and, according to bankers’ calculations, rose to USD 23.1 billion as of the week ending July 19. In other words, reserves excluding swaps are now on the positive side and the Central Bank will continue to accumulate reserves. According to economists, there is no longer any obstacle for the completion of swap transactions with other countries’ central banks.
