Turkey pressuring banks to limit foreign currency buying as lira slides - FT

Turkey’s central bank and other state institutions are pressuring banks to limit sales of foreign exchange to corporate clients after the lira fell against the dollar, sparking concerns for a fresh sell-off in the fragile currency.

The central bank is looking into foreign exchange transactions worth as little as $1 million, bankers in Istanbul said, according to the Financial Times.

“Even for $1 million or $2 million, they are calling to check: who is the buyer?” one Turkish banker said, the FT reported on Thursday. “They’re really anxious about the corporate flow.”

Turkey’s lira has declined for the last six trading days, taking losses this year to almost 15 percent and falling through a psychological barrier of 15 per dollar. The currency slumped by 44 percent last year after the central bank followed orders from President Recep Tayyip Erdoğan to cut interest rates even as inflation accelerated. It has kept rates steady at 14 percent in 2022 despite a surge in annual price increases to 70 percent.  

Bankers say they have little choice than to comply with demands for advance central bank approval for larger FX purchases due to the increased political pressure the sector has come under from the government, the FT said. Banks have been told to refuse some purchase requests, especially if they exceeded $5 million, it said.

Erdoğan has sacked three central bank governors in three years. The institution says it is following a so-called "liraization strategy" as its main policy. It questions why it should raise interest rates to deal with inflation and says it expects price increases to slow after May. 

One banker said meddling by the authorities “has been intensifying” and the sector was “coming under closer scrutiny.”

Turkey had faced the prospect of a full-blown financial meltdown when the lira hit successive record lows in December, forcing the government to introduce special bank deposits that compensated Turks for losses in the lira against the dollar to help steady the currency.

Before last week, the lira had been trading in a narrow band at between 14.5 per dollar and 14.75 per dollar for almost two months as the central bank and state-run banks helped steady its value through interventions in the market. Economists warned that the intervention policy was unsustainable due to increasing global demand for the dollar.

Pressure on banks and companies to limit foreign exchange purchases also comes at a time when liquidity in Turkey’s currency market is very shallow – many foreign investors have given up on trading in the lira, partly due to interference by the authorities in the normal functioning of the market.

One banker said central bank officials were respectful in their requests. “The guys at the central bank know this cannot be a permanent solution,” the banker said.

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