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A loan system that Ankara hoped would help curb the Turkish lira’s slump and keep interest rates in check has left Turkish taxpayers with a heavy bill. The scheme, which uses domestic gold and hard currency loans, has not only failed to deliver the expected results, but has more than doubled the costs Turkey’s treasury would have paid had it borrowed in liras, experts estimate.
Although foreign borrowing was the order of the day, the Treasury would shy away from domestic hard currency borrowing, a resource that cost it dearly in the years leading up to Turkey’s great financial crisis in 2001. The International Monetary Fund, which Ankara’s recovery program at the time, had also warned against the use of those resources. Under the Justice and Development Party, which came to power in November 2002, the Treasury has gradually reduced domestic foreign-currency borrowing and set it to zero by 2012.
Yet the risky method made a comeback after President Recep Tayyip Erdogan was appointed The weight of Albayrak, his son-in-law, as finance minister in July 2018 when Turkey transitioned to an executive presidency system that concentrated power in Erdogan’s hands. Albayrak, whose economic decisions were often labeled by opposition critics as “the courage of ignorance”, kept the post until his death. controversial dismissal via Instagram in November 2020. Using various securities such as gold bonds and gold and euro-denominated lease certificates, the Treasury borrowed lavishly at home under Albayrak, building up domestic foreign currency debt equal to nearly a third of its foreign debt stock.
The main purpose of the Treasury was to lure gold from citizens into the economy. To protect their savings from inflation and the depreciation of the lira, Turks traditionally put their money in hard currency and gold. Such assets are often hoarded at home and are commonly referred to as under-the-mattress savings. As the Treasury said on its website at the time, “The gold under the mattress” [in Turkey] is valued at minimum 2,200 tons ($100 billion). The issuance of Gold Bonds/Gold Denominated Lease Certificates aims to attract these assets to the economy and strengthen the country’s reserves.”
By the time Albayrak shut down, the Treasury’s domestic debt, expressed in foreign exchange, was $36 billion, while its external debt was $102 billion. As a result, the foreign exchange liabilities amounted to 56% of the Treasury’s debt stock. Under Albayrak’s successor, Lutfi Elvan, the domestic debt stock in foreign exchange and gold fell by $3 billion, but the combined amount of foreign exchange liabilities rose to 58.3% of the debt stock in June.
Ironically, Albayrak turned to domestic foreign currency loans while Ankara was on the phone on citizens to trust the Turkish lira and stay away from hard currencies after the lira took a nosedive in the second half of 2018 amid unrest sparked by declining investor confidence into how Erdogan would manage the economy after assuming sweeping executive powers. It was a risky move by Albayrak, but he apparently hoped it would generate a lot of interest and help increase foreign exchange liquidity and curb the lira’s slump. By avoiding loans in lira, Ankara also hoped to avoid the rise in interest rates.
To persuade citizens to bring out their gold, Treasury Announcement stressed that they could earn “extra returns of 1.2% over six months (2.4% over a year) from gold kept under the mattress or in vaults for no returns,” adding that the returns would be exempt from withholding tax. “Citizens will be able to sell their gold bonds/gold-denominated lease certificates to their intermediary banks and get the money they need whenever they want, just as gold is sold under the mattress in the market and turned into cash,” it said.
Still, such a loan appeared to have little impact in easing the currency turmoil. Even backdoor sales of hard currency by the central bank, causing it to burn out $128 billion in foreign reserves, failed to stop the collapse of the lira. The dollar price stood at 8.59 lira in November when Albayrak stepped down, compared to 4.72 lira in July 2018 when he took office.
The price of gold provided another headwind and rose to $1,800-$1,900 an ounce from $1,200-$1,300 as gold securities began to mature.
As a result, the fall of the lira and the rise in the gold price have both increased the cost of domestic foreign exchange and gold borrowing.
Prominent Turkish economist Ugur Gurses estimates that the $19.2 billion bonds matured as part of domestic foreign exchange and gold loans under Albayrak have yielded an average cost of 31.8% per annum, including the interest paid on the bonds and the differences resulting from the rise in gold and foreign exchange rates, while the average cost of lira bonds with market yields would have been 14%. Whether these costs increase further depends on exchange rates, gold prices and Turkey’s inflationn rate, which looks set to reach an annual 20% rate soon.
That said, any increase in exchange rates also affects the cost of repayment of Turkey’s external debt, which totals $450 billion by the end of 2020. The public sector owns 38%, or $173 billion, of that debt, including $102 billion held by the Treasury and the rest by public banks and corporations. Public sector external debt grew from $136 billion at the end of 2017, with the Treasury’s share reaching $93 billion.
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