Why Turkey sells dollars "through the back door"

Turkish state-owned banks launched an aggressive sell-off of dollars this week, boosting the pound rally, following announcements by Recep Tayyip Erdogan about a new deposit protection program aimed at halting a monetary crisis.

According to sources quoted by Reuters, adding that these massive sales coincide with the fall of the central bank's foreign exchange reserves, by almost $ 6 billion on Monday and Tuesday alone.

A second source, chief banking adviser, said state-owned banks' interventions on Monday and Tuesday totaled $ 3 billion. The other two sources, including a senior Turkish official, said the operations were intense and were extended later in the week.

Both the Central Bank and the three major state-owned banks - Ziraat Bank, Vakif Bank and Halk Bank - did not comment on the news.

The pound is recovering

The pound has jumped more than 50% this week, recovering from historic lows after Erdogan announced late Monday a plan in which the finance ministry and the central bank would guarantee some local currency deposits in the face of devaluation losses.

In 2019-2020, the central bank backed through exchanges the sale of about $ 128 billion through state-owned banks to stabilize the pound, depleting Turkey's foreign exchange reserves. Earlier this year, sales were at the heart of what the political opposition calls government mismanagement.

To address the latest market turmoil, the central bank announced five immediate market interventions this month, worth between $ 6-10 billion.

Official figures show the bank's net foreign exchange reserves fell to $ 12 billion last week, from $ 21 billion last week.

The government says the deposit protection system encourages Turks to keep pounds instead of hard currencies, which account for more than half of local savings.

Analysts have warned that if the pound rally goes off and reverses, the plan could further trigger inflation, increase government debt and destroy foreign exchange reserves.

Faik Oztrak, a spokesman for the main opposition CHP, said on Twitter that the pound had jumped "apparently due to the sale of foreign currency again through the back door", citing a drop in net inventories of $ 6 billion on Monday and Tuesday.

Source: Financial Postman