Badly-designed borrowing program costs Turkey twice as much


A borrowing program that Ankara says would help curb the fall of the Turkish lira and control interest rates has created a heavy bill for Turkish taxpayers. The program, involving domestic borrowing in gold and hard currency, not only failed to deliver the expected results, but also more than doubled the cost the Turkish Treasury would have paid had it borrowed in lire, experts say. .

While external borrowing was commonplace, the Treasury would be reluctant to borrow domestically in hard currency, a means that had cost it dearly in the years leading up to Turkey’s great financial crisis in 2001. The Fund International Monetary, which sponsored Ankara’s stimulus program at the time, also warned against using this medium. Under the Justice and Development Party, which came to power in November 2002, the Treasury gradually reduced domestic borrowing in foreign currency and reduced it to zero in 2012.

Yet the risky method made a comeback after President Recep Tayyip Erdogan appointed Berat Albayrak, his son-in-law, as Treasury and Finance Minister in July 2018, as Turkey moved to an executive presidency system that focused on power in Erdogan’s hands. Albayrak, whose economic decisions have often been called “the courage of ignorance” by opposition critics, held the post until his controversial resignation via Instagram in November 2020. Using various headlines such as bonds in gold and gold and euro lease certificates, the Treasury borrowed heavily from its home under Albayrak, accumulating foreign currency-denominated domestic debt equivalent to nearly a third of its stock of foreign debt.

The main objective of the Treasury was to attract the gold held by the citizens into the economy. To protect their savings against inflation and the depreciation of the pound, Turks have traditionally put their money in hard currency and gold. These assets are often accumulated at home and are widely referred to as savings under the mattress. As the Treasury stated on its website at the time, “the gold under the mattress [in Turkey] is estimated to be at least 2,200 tonnes ($ 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.

At the time of Albayrak’s resignation, the Treasury’s domestic foreign currency debt stood at $ 36 billion, while its external debt stock stood at $ 102 billion. As a result, foreign currency liabilities amounted to 56% of the outstanding Treasury debt. Under Albayrak’s successor Lutfi Elvan, the stock of domestic foreign currency and gold debt declined by $ 3 billion, but the combined amount of foreign currency liabilities rose to 58.3% of its debt stock in June.

Ironically, Albayrak turned to domestic borrowing in foreign currencies as Ankara called on citizens to trust the Turkish lira and stay away from hard currencies after the pound fell in the second half of 2018 in a backdrop of unrest fueled by declining investor confidence in how Erdogan would run the economy after assuming broad executive powers. It was a risky move on Albayrak’s part, but he apparently hoped it would attract a lot of interest and help increase currency liquidity and thus curb the fall of the pound. By avoiding borrowing in lire, Ankara also hoped to prevent rising interest rates.

To coax citizens into pulling out their gold, the Treasury announcement pointed out that they could earn “an additional 1.2% six-month (2.4% year-on-year) return on gold that is held in cash. the mattress or in bank vaults without any yield, “adding the yields would be exempt from withholding tax. “Citizens will be able to sell their gold bonds / gold-denominated rental certificates to their intermediary banks and get the money they need whenever they want, in the same way that gold under the mattress is sold in the market. and converted to cash, ”it said.

Yet these loans seemed to have little impact in easing the monetary turmoil. Even the central bank’s misappropriation of hard currency sales, which caused it to spend $ 128 billion in foreign exchange reserves, failed to stop the pound from falling. The dollar was 8.59 lire in November when Albayrak resigned, compared to 4.72 lire in July 2018 when he took office.

Gold prices provided another headwind, reaching $ 1,800 to $ 1,900 per ounce, rising from $ 1,200 to $ 1,300 as gold stocks began to mature.

As a result, the fall of the lira and the rise in gold prices have both increased the cost of domestic borrowing denominated in foreign currencies and gold.

Prominent Turkish economist Ugur Gurses estimates that the $ 19.2 billion bonds that matured as part of domestic foreign currency and gold borrowing under Albayrak produced an average cost of 31.8% per annum , including the yields paid on bonds and the differences resulting from the increase in the price of gold and currencies, while the average cost of bonds in lira with yields at market rates would have been 14%. The further increase in this cost will depend on exchange rates, gold prices and Turkey’s inflation rate, which soon appears to be reaching 20% ​​per year.

That said, each increase in currency rates also weighs on the cost of repaying Turkey’s external debt, which stood at $ 450 billion at the end of 2020. The public sector holds 38%, or $ 173 billion, of Turkey’s foreign debt. this outstanding debt, including $ 102 billion held. by the Treasury and the rest by banks and public enterprises. The public sector’s external debt rose from $ 136 billion at the end of 2017, of which the Treasury’s share stood at $ 93 billion.


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