The recent sharp moves by Turkey’s Central Bank to protect the domestic currency from devaluing against foreign currencies is not sustainable, and the bank’s foreign exchange reserves are at a critical level, economists have said.
The former bank chief joined the criticism, adding that government officials should have avoided announcing a dollar-Turkish Lira rate target in a foreign exchange regime, and a former economy minister warned that the bank should not rely so heavily on the government.
Turkey’s Central Bank undertook surprise moves over two consecutive days on Oct.5 and 6, selling a total of $1.1 billion in daily auctions and changing the rules for banks’ foreign exchange reserves in a bid to protect the lira from further depreciation and to provide foreign exchange liquidity in the markets.
The Central Bank sold $350 million to banks on Oct. 7, down from $750 million. The bank in Ankara offered as much as $1.35 billion on Oct. 5 and 6, and sold a record $750 million and $350 million on Oct. 5 and 6. respectively.
Following the moves, the lira rose 0.4 percent at 1.8377 against the dollar at 11:01 a.m. in Istanbul, rallying 3.9 percent since it touched its historic low at 1.9096 on the Oct. 4.
However, some economists argue that further intervention would seriously threaten the Central Bank’s dollar reserves, which currently stand at $85 billion.
The impression left on markets by the recent moves was that Turkey’s “Central Bank did not calculate in details what steps it would take,” Erdal Sağlam wrote in his column in the daily Hürriyet on Oct. 6.
Sağlam said a continuously changing foreign exchange rate policy harmed a considerable number of players and had few winners. “To relieve markets, the Central Bank should meet the whole quantity of foreign exchange it offers at the beginning of the bid,” he said, adding that the bank should also be able to foresee what the quantity demanded would be.
The former Central Bank Gov. Durmuş Yılmaz criticized the authorities and the Central Bank for mentioning foreign exchange rate targets. “No target can be put in a floating foreign exchange regime. If put, someone will test it. This is what happened. I was also tested when I first started [leading the Central Bank],” he said on Oct. 6. Officials have previously said the ideal foreign exchange rate would be somewhat at 1.75 liras per dollar.
Former economy minister Kemal Derviş said extraordinary weakness in the lira must “be softened a little,” although an overvalued lira can be more harmful for Turkey’s economy.
It is very important that Turkey’s regulatory boards maintain their independence, Derviş said in an interview with Bloomberg HT television in Istanbul on Oct. 7.
Economy Minister Zafer Çağlayan, on the other hand, defended the bank’s moves, telling journalists that market players should have confidence in such moves, at a meeting in Ankara’s Industrial Chamber on Oct. 7.
“The Central Bank will intervene whenever necessary to put out fire if the fire gets too large, and bring it to normal levels whenever it is too small.”
Given the turbulence in the global economy, the Central Bank’s moves are consistent with the monetary policy targets, Asaf Savaş Akat wrote in his column in Vatan daily on Oct. 6.
“I personally don’t think they are going to work in the wrong way,” Emre Deliveli, an economist and columnist at the Hürriyet Daily News, said during a phone interview on Oct. 6. The Central Bank was playing the markets, trying to show it has the ability and determination to intervene when deemed necessary and “hoping that by playing tough they can prevent further depreciation,” he said.
Deliveli warned, however, that the bank would not be able to do this for long. “You cannot fight markets. The Central Bank is just at the limit [of the ratio of foreign exchange reserves to the total external debt].”
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Source : hurriyetdailynews.com
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