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Turkish central bank chief backs costly FX policy in 2019-2020 in first TV interview

Turkish Central Bank Governor Şahap Kavcıoğlu

Şahap Kavcıoğlu, an economist and former ruling party lawmaker who was appointed Turkey’s central bank governor over a month ago, has used his first televised interview to defend foreign exchange sales in the last two years that are estimated to have cost the country more than $100 billion in reserves.

“As a result of the forex transactions, citizens, foreign investors and the real sector overcame the 2020 pandemic crisis without so much as a nosebleed,” Kavcıoğlu said in an interview on Friday with state broadcaster TRT.

The lira’s depreciation could have gotten out of control and borrowing costs would have soared if authorities hadn’t intervened last year, he argued, adding that what necessitated the FX sales by state banks was the “exchange rate attacks” that began during a 2018 currency crisis.

“You need to meet the FX demand of last year. If you don’t, Turkey would have to face the consequences,” Kavcıoğlu said, citing corporate bankruptcies during a financial crisis two decades ago as examples of how bad things could get.

Kavcıoğlu’s remarks came as Turkey’s main opposition Republican People’s Party (CHP) had been pressing President Recep Tayyip Erdoğan and his Justice and Development Party (AKP) government to account for FX sales by state banks in 2019-2020, which opposition parties say cost Turkey about $128 billion and still failed to stabilize the lira.

Opposition parties accused Berat Albayrak, Erdoğan’s son-in-law who was serving as the country’s treasury and finance minister at the time, for the estimated $128 billion in sales by state banks, which were backed by central bank swaps and cut net FX reserves — a country’s buffer against financial crisis — by about 75 percent.

Excluding the swaps, the buffer is deeply negative.

In an attempt to exonerate Albayrak, Kavcıoğlu noted that reserve policies have been in use since 2017, when a protocol signed between the central bank and the treasury enabled such unannounced foreign-currency interventions.

Following the interview, critics argued that Kavcıoğlu’s success story regarding how the forex transactions helped the country to overcome the crisis during the pandemic “without so much as a nosebleed” didn’t reflect the truth as Turkey had witnessed harsh economic conditions that drove many to suicide last year.

Kavcıoğlu is the fourth central bank governor since 2018 after Erdoğan fired three predecessors using the vast powers he gained through the executive presidential system four years ago. Naci Ağbal, who had held the same position for less than five months, was sacked last month, only days after a sharp interest rate hike to head off inflation by Erdoğan, who has repeatedly called for low rates.

The new central bank governor had previously criticized Ağbal’s rate hikes in a column he wrote for the pro-government Yeni Şafak daily, echoing the president’s unorthodox view that high interest rates cause inflation.

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