Turkish central bank taps into foreign reserves to stabilize currency

ByNews Desk- The Cradle 

Turkiye continues sales of foreign currency reserves to stabilize the lira and combat inflation in the wake of the devastating 6 February earthquake

Hoping to stabilize the lira in the aftermath of the devastating earthquake on 6 February, the Turkish central bank has sold some $7 billion of foreign currency reserves in the past two weeks.

The move has so far proved successful despite economic woes resulting from the quake, which has killed over 40,000 people in Turkiye and Syria and destroyed large segments of Turkiye’s southeastern cities, causing a massive housing crisis, Reuters reported.

In foreign exchange (FX) markets, the lira has fallen only 0.2 percent versus the US dollar since the initial quake. However, using foreign currency reserves to prop up the lira is a short-term solution that may not be sustainable in the weeks ahead.

“This (tapping reserves) cannot be sustained for a long time since the reserve adequacy is low. So I expect the continuation of the steps to reduce the foreign exchange demand,” an FX trading desk manager at one bank warned.

Central bank data show FX reserves dropped by $4 billion the week after the quake, and by another $3 billion last week, to $122.6 billion.

The central bank declined to comment on the drop in FX reserves, but tapping reserves to stabilize the lira has been a regular feature of Ankara’s economic policy in response to the historic collapse in the value of the lira in late 2021.

Over the past year, Turkish authorities have been unsuccessful in steadying the lira to combat inflation, which soared above 85 percent last year.

Over a several-month period in late 2021 and early 2022, the central bank made nearly $20 billion in foreign reserve sales in an attempt to uphold the currency. Despite this, the lira fell in value from 10.25 to 18.4 liras to the dollar, which shook the economy and increased inflation.

One possible positive factor for the stability of the lira, however, is international aid flows. US investment bank JP Morgan estimated the damage to buildings and infrastructure from the quake has amounted to some $25 billion and said “international aid can compensate for the pressure on” the lira as US dollars and other foreign currencies arrive in Turkiye to assist the victims and help rebuild areas devastated by the quake.

According to Kit Miyamoto, the founder of a structural engineering firm and disaster-response investigator, a massive rebuilding effort is needed.

“Some of the cities have been more than 50 percent or more completely destroyed. Places like Hatay, are [built] on a soft riverbed [geology]. Certain areas of the city look like a nuclear blast, like pictures from Hiroshima,” Miyamoto said.

The UN launched a campaign to raise $1 billion last week to help quake victims in Turkiye. UN Secretary-General Antonio Guterres said that the funds would provide humanitarian relief for three months to 5.2 million people and that the money would “allow aid organizations to rapidly scale up vital support” in the areas of food security, protection, education, water, and shelter.

“The needs are enormous, people are suffering, and there’s no time to lose. I urge the international community to step up and fully fund this critical effort in response to one of the biggest natural disasters of our times,” Guterres urged.