A mystery surrounds the end of year windfall for Turkey’s central bank | Financial market news

Turkey’s central bank had forecast a loss of $ 5.2 billion on December 30, but managed to end the year with a profit of $ 4.4 billion.

Turkey’s central bank posted an extraordinary daily profit of around $ 10 billion on the last day of 2021, prompting questions about the cause of this overnight windfall that will trickle down to the country’s treasury.

The monetary authority had forecast an annual loss of around 70 billion lire ($ 5.2 billion) on December 30, but ended the year with 60 billion lire in profits, an unprecedented change in fortune in a single day, according to his daily report. In February, the Treasury and Finance Ministry – as the central bank’s largest shareholder – will start collecting a large chunk of that sum in the form of dividends.

The sharp turnaround comes after President Recep Tayyip Erdogan unveiled measures intended to compensate lira investors for any losses. Turkey’s currency slipped 44% against the dollar last year, largely as the central bank – encouraged by Erdogan – has cut its policy rate by 500 basis points since September.

The depreciation of the pound fueled the rise in consumer prices, with inflation ending the year at over 36%, the highest level since September 2002. This eroded Erdogan’s popularity as the 2023 elections. But even with guaranteed returns on lira deposits, Turkish investors are still clinging to foreign currencies, undermining the Turkish leader’s plan to support the pound without raising interest rates.

Erdogan, who attacked high borrowing costs as a drag on economic growth, pledged to remove the inflation “bubble” in a speech Tuesday, calling exchange rate fluctuations and price increases “excessive” “thorns” on the way to Turkey. Its policy of lowering rates to bring down inflation goes against mainstream economic thinking.

The central bank declined to comment on the dramatic decision of its balance sheet, which was first reported on Monday by the bank’s former deputy governor Ibrahim Turhan and ex-banker Kerim Rota, both members of the Party of the future, the opposition. Two officials familiar with the matter said this was in line with the accounting advice of the independent auditors, but asked not to be identified due to the sensitivity of the matter.

According to Turhan, a possible explanation for the huge increase in overnight profits could lie in the sale of foreign exchange reserves to the Treasury. The depreciation of the pound makes foreign reserves more valuable in local currency, but this cannot be recorded in the profit column until the reserves are sold, he said.

The same amount of dollars would then have to be redeemed to maintain the level of reserves, Turhan said.

The Treasury’s borrowing program for the current three-month period showed that the authorities were already expecting Lira 44 billion in external revenue next month.

(Updates with Erdogan’s speech, inflation and read details from the third paragraph)

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