Turkey’s President Recep Tayyip Erdogan said on Wednesday that the opposition was “wrong from head to toe” about central bank sales of foreign currency, saying the country was fighting a “triangle of evil” of interest rates, inflation and exchange rates.
Responding to growing pressure to account for some $128 billion in FX sales in 2019 and 2020, which badly depleted reserves, Erdogan said the political campaign was based on lies – but he also held out the option to conduct such sales again.
“We carried out a battle…against the triangle of evil of interest rates-exchange rates-inflation in the economy,” Erdogan told his ruling AK Party members in parliament, attacking the main opposition CHP party for inflating the amount sold.
“Neither the figure, nor the meaning attached to that figure and the campaign being run over that figure are correct,” he said. “They are wrong from head to toe, utter ignorance.”
Still, Erdogan in the same speech said some $165 billion from central bank “sources” were used to support the economy and lira currency in 2019-2020.
The lira in response dipped as much as 1% against the dollar to its weakest level in more than a week, as investors remain uneasy about economic policy after Erdogan abruptly fired the central bank governor last month.
The CHP has called on the government to account for the unorthodox policy of FX sales conducted via state banks, in order to support the beleaguered lira.
The sales were backed by swaps with the central bank, which saw its net FX reserves drop by about 75%. Excluding the swaps, the bank’s FX buffer remains deeply negative, leaving Turkey more vulnerable to crisis, analysts say.
A Turkish trader, requesting anonymity, said the lira was underperforming peers Wednesday due to Erdogan’s comment that reserves could be used again according to market conditions.
Erdogan said that in the last two years the central bank had used around $30 billion to finance the current account deficit, $31 billion was recorded in capital outflows, and customers had bought $54 billion worth of forex and gold.
A month ago, Erdogan sacked the central bank’s hawkish and well-respected governor, Naci Agbal, sparking a market selloff as investors feared rapid rate cuts. Agbal had stopped the FX sales policy and promised to rebuild the buffer.
The new governor left the bank’s policy rate unchanged at 19% last week. Annual consumer price inflation rose above 16% last month.