Coining for the Palace

Politicians may have an inclination to regard the Central Bank as a “cow of the government to be milked.” But it is logic blowing that those who have undertaken CB jobs have rolled up their sleeves and personally worked for that.

The most important institution based on trust is the Central Bank (CB). The reason is that they print the money of that country. The money is credible first by gaining the trust of the citizens of that country.

Our Central Bank has been losing its credibility for a long time. The year 2019 will be remembered as the year when its reputation fell to the floor.

Unprecedented things happened in the bank in 2019. The institution that prints the country’s national money has been filleted. 

This institution which was given the power to print money has been engaged, not to print the national money and protect its reputation, but to protect the political survival of those governing. 

First of all, the period income of the bank would normally be distributed after its general assembly held in mid-April. When the calendar year changed because of a law amendment, it was made possible for the treasury to take this income in advance.  

Second, again with a legal amendment, the contingency reserve of the bank was turned over to the treasury. The contingency reserve accumulated until 2019 was 42 billion Turkish Liras. This amount was taken in July and August and released to finance government expenses.

Third, the president of the bank was dismissed. The reason for this was not based on any justification listed in the bank’s founding law. It was done through the President’s directive based on changes done through a decree-law (KHK). The real reason was apparent. He had angered the President. The newly appointed president of the bank was later found out that he had plagiarized line by line in his master thesis from other theses written before. No politician stepped forward at that time while in normal circumstances, this mistake would have been corrected immediately considering the reputation of the country’s money. 

Fourth is, for the first time, a portion of the Turkish Lira operations were hidden from the public. The volume of swap transactions started not appearing in the publicly announced balance sheets. It is an understandable situation that a central bank sells foreign currency, makes interventions in the market and then would justify by saying that disclosing every detail would put them in a weak position. However, we have never seen a central bank that has hidden the source of the national currency it has released. 

Fifth, the factor that caused the hide of the swap transactions was that the bank was selling its reserves to public banks covertly and then the latter would sell them to the market. The central bank of a country where free floating exchange regime is claimed to be followed, was deceiving economic entities. Even if we were following a “managed float regime” we would have known when the CB would sell foreign exchange and which band it maintained. This veiled vague exchange rate regime can only be named “disguised floating exchange rate regime with a back door to fixed exchange rate system.”  

According to the calculation of economist Haluk Bürümcekçi over the bank’s foreign exchanges flows, roughly there is a 31 billion dollars’ worth of “foreign currency leak.” The meaning of this is that while the bank’s reserves would have increased that much, they are not seen in the reserves. What happened to this foreign currency? We know the answer. The roughly 30 billion dollars bought by residents since the beginning of the year, were sold “from the back door.”

Since July, the CB lowered interests 12 points. The exchange rate did not “bounce.” In the pro-government media comments and headlines such as “How come the exchange rate did not bounce when the interests were lowered? What happened?” appeared. As a matter of fact, the exchange rate did not jump because the approximately 30 billion dollars that would have been the public’s had melted; it had evaporated. 

Sixth is this business carried with the small-town merchant mentality leaves a very bad stink for the CB staff. “Unrealized foreign exchange gain” accumulated at the valuation account has been transferred to profit and loss account through side tracks. 

This topic was in the public debate at the end of October. An amendment was referred to in the bank’s law. However, even though the CB has been formed as an incorporated company, it is a privileged company with its power to print money. If profits from foreign exchange transactions occurred, it was through selling and buying of foreign currency. This was predominantly from discount transactions and through transactions done with the Treasury.   

In the inflation report presentation dated Oct. 31, this was repeatedly asked to CB Governor Murat Uysal. His answer was “There is no study done in this field.” The topic that was asked numerously (as I have also asked) was basically what the bank management’s attitude in this area was. Playing stupid, his only answer was there was no study in that field. As a matter of fact, it was pretty clear a couple of weeks later that accounting geniuses in the bank have already begun these transactions cheek by jowl. It goes without saying that Uysal also knew about it.

The business done since mid-October is this: By doing certain buying and selling operations, the unrealized foreign exchange profit in the valuation account have been changed into realized profit and transferred into P&L account.

This was also disclosed by economist Haluk Bürümcekçi and written in the report he submitted to his customers. 

My calculations as of the end of December show that a roughly 22 billion TL foreign exchange valuation have been transferred to profit and loss account through certain operations. Thus, the Central Bank’s 2019 profit will be 22 billion TL fatter. As of January 10, this profit will be transferred to the Treasury’s account together with other profit amounts accumulated up to that day. The Treasury will pump this to the market.

Consequently, in the January 2019 to January 2020 period, including the profit of the CB, reserves and the valuation account tampered with questionable methods, money over 100 billion liras will be released. I guess it would have been better than this if the CB had given advance (loan) to the Treasury.

The mission assigned to the Central Bank President by law is to provide “price stability.” In other words, maintain a low-level inflation. 

However, year 2019 has been a complete fiasco. Managers of the bank who have their signatures on our money have been after changing of the bank’s foreign exchange valuation account to profit making in a very short time, providing money to the government, shaming generations of idealist employees of the Central Bank. 

Politicians may have an inclination to regard the Central Bank as a “cow of the government to be milked.” But it is logic blowing that those who have undertaken CB jobs have rolled up their sleeves and personally worked for that.  

Year 2019 has also been a year when residents bought 30 billion dollars. When we have such politicians and such CB executives who run in front of them, the money they sign is not very much demanded. Money of reputable countries is demanded. Incompetent monetary policy cannot protect the Turkish Lira, and it was the last straw to tell the banks that the CB will take higher commissions for the required reserves for foreign exchange.

Gresham’s law is in place, which says "bad money drives out good".

September 10, 2021 Central Bank's Beştepe problem