The head of Turkey’s Central Bank mounted a defence of its crisis-era policies on April 30, playing down a sharp drop in foreign currency reserves and dismissing concerns that it was defending the currency from falling past key levels. 

In an online presentation, Governor Murat Uysal said the coronavirus pandemic brought on “extraordinary circumstances” in which temporary volatility was expected in the bank’s financial buffer.

Yet in a nod to the growing cash crunch, Uysal said he continued to hold talks on foreign swap lines with several central banks. He declined to give details and said no attempt had been made with the International Monetary Fund (IMF), an option President Tayyip Erdoğan has dismissed on political grounds. 

The Central Bank also lowered its inflation forecast for end-2020 to 7.4%, from 8.2% earlier, opening the door to more rate cuts. Steps taken to slow the outbreak are expected to tip the economy into its second recession in less than two years. 

“Volatility is normal … and in our reserves it is due to extraordinary circumstances,” Uysal told journalists and economists in the presentation. 

The Central Bank is backstopping much of Turkey’s financial response to the pandemic, including buying a record of some $5 billion of government bonds since the end of March, most of it from an unemployment insurance fund. 

The money-printing has pressured the lira, which has fallen 14% so far this year, slowing the expected drop in inflation. 

At the same time, the central bank has aggressively burned through its foreign reserves to fund, via swaps, unorthodox efforts by Turkey’s state banks to prop up the lira, which has hovered just below 7 versus the dollar since mid-April. 

Based on reserves data and the calculations of traders, the state banks have sold at least $32 billion in dollars this year, already matching the value of last year’s market interventions. 

The result has been a dramatic fall in the central bank’s net FX reserves to $25 billion as of last week, from more than $40 billion at the beginning of 2020. Excluding the swaps with state banks, some economists say the net reserves may have already fallen into negative territory. 

Uysal said it was a “temporary” drop in the buffer, and added the lira’s decline in recent months shows the bank is not targeting certain levels. 

“We are not acting to defend the exchange rate,” he said. “There might be periods in which we cannot manage merely with the interest rate, so we value exchange rate stability.”