While Türkiye In the run-up to the election, its central bank is once again trying to evade and maneuver to ensure a relatively stable exchange rate, so it has introduced a kind of indirect and idiosyncratic capital control. According to currency traders who spoke to Bloomberg on condition of anonymity, Bank of Turkey he interferes in the foreign exchange market to the extent that he actually decides who will sell Turkish lira or vice versa hard currency and at what rate. These forex traders describe a central bank that is in constant telephone contact with the country’s banks, monitors and controls prices as soon as they appear on the trading platforms, and demands detailed information about foreign exchange transactions. And, in particular, it requires banks to artificially equalize the demand for foreign currency with the supply of foreign currency.

With this tactic, Turkey effectively prohibits the purchase of foreign currency without the permission of the central bank, which requires the interested party to give “good” reasons for buying foreign currency and gives its permission only if there is a corresponding inflow of dollars into the store. This tactic is different from other similar tactics taken by the Bank of Turkey in the past when the neighboring country’s authorities tried to control the supply of foreign currency. Now they are trying to control demand as well.

According to Urlich Leuchtmann, head of foreign exchange strategy at Commerzbank, such close oversight constitutes “soft capital controls” that cannot remain in place long after the election. He emphasizes that “it is reasonable that the Turkish authorities will try to maintain this situation, that is, slow down the devaluation of the Turkish currency, until the elections are over. However, he adds that “no central bank can permanently set the exchange rate of its currency at an unsustainable level.” Similar are the assessments of Peter Mathis, currency analyst at In Touch Capital Markets, who emphasizes that “forex interventions are very costly, and therefore the central bank will allow the pound to move much more freely after the election.”

Türkiye effectively prohibits the purchase of foreign currency without the permission of the central bank.

Indeed, the very close monitoring of transactions by the Turkish authorities has already put pressure on some aspects of the market, sometimes due to the occasional surge in the dollar against the Turkish lira, and sometimes due to a temporary surge in the cost of borrowing in Turkish lira. Yesterday at the beginning of the session, the Turkish lira fell by 0.9% to 19.29 Turkish lira per dollar. Then the rate fell slightly to 19.27 Turkish liras per dollar. Meanwhile, Turkish authorities have introduced a series of rules to support what the central bank calls “the efficient functioning of financial markets.” At the same time, however, the stabilization of the Turkish currency has caused problems for the country’s export business, which finds it difficult to cope with the strengthening of the Turkish lira.

One of the maneuvers that the Bank of Turkey used to artificially prop up the Turkish lira was its decision to offer a better exchange rate to those exporting firms committed to holding funds in Turkish lira and not rushing to buy foreign currency. Central bank interventions of various kinds are very costly. Bloomberg Economics estimates that his foreign exchange interventions with purchases of Turkish lira have cost him about $128 billion from December 2021 to date. If we take into account its obligations, the central bank’s financial position is in the “red zone”, and Turkey’s current account deficit reached $9.85 billion in January, setting a historical record. Recall that Turkey freed the Turkish lira in 2001, just before the financial crisis. Since then, currency traders have repeatedly clashed with the central bank over its new policies.