What is Foreign Exchange Reserve? Why Is The Central Bank Reserve Important?

The event that left its mark on 2020 in the world was a pandemic, and its effects still continue. The pandemic is undoubtedly the most important topic domestically, but another issue that has been discussed economically during the year was reserves. Criticizing the decrease in the CBRT’s reserves, President Erdoğan, “For some time already supposed to develop measures against the financial turmoil emerged in the international arena with Turkey’s economic secretion it is under attack. In this difficult period, planned and controlled foreign exchange transactions were carried out in order to avoid any problems in the balance of payments. All of these foreign exchange transactions are within the market rules and in accordance with the law. There is neither the evaporation of the foreign exchange nor any abuse, unfair gain, unlawful and immoral transaction. Thanks to these foreign exchange transactions, our country managed to stay true to its targets despite the shocks that had serious effects on the international arena. made the explanation.

What is the currency reserve that comes to the fore often?

The CBRT defines its foreign exchange reserves as follows: A country’s foreign exchange reserves are external assets that are ready-to-use controlled by monetary authorities in case of external payment difficulties.

What are reserves made of?

• Convertible (convertible) foreign currency assets (euro, US dollar, British pound, etc.)
• International standard gold
• Special Drawing Rights
International Monetary Fund (IMF) Reserve Position

Why are foreign currency reserves important?

Being able to resist economic shocks, supporting foreign debt payments, decreasing borrowing costs as a result of economic recovery and decreasing country risk premium and having the confidence to attract foreign investment are directly related to reserves.

Why do central banks keep reserves?

• Supporting the monetary and exchange rate policies applied,
• To minimize the negative effects of shocks experienced in times of crisis on the national economy,
• Realizing foreign debt payments and helping the country meet other foreign currency needs,
• To have the necessary foreign currency liquidity for balance of payments needs.

What are the purposes of foreign exchange reserves other than being able to use them in case of economic difficulties?

The volatility in foreign exchange markets increased with the transition to floating exchange rate regime in 2001, and the central bank uses foreign exchange reserves to reduce volatility when necessary. At this point, we should add two important statements of the CBRT:

First, the central bank does not have a currency target,
Latter the necessity, although it cannot be a currency target.

The center explains this requirement as follows: “The CBRT continues to take necessary measures by closely following the developments in foreign exchange supply and demand in order to support the healthy operation of the foreign exchange market and support the foreign exchange liquidity, and in case of unhealthy price formations in exchange rates as a result of speculative behaviors due to the loss of market depth, and in cases of excessive volatility, the market is can be intervened. ” In other words, the central bank, which has a short-medium and long-term target in inflation, does not have such a target on the currency side, but when the volatility in the exchange rate creates a risk of deterioration in targeted indicators, especially inflation, the center can intervene through both verbal guidance and foreign exchange auctions and interest. This is practiced in almost all central banks, from the Fed to the ECB.

How are gross reserves and net reserves calculated?

Last week required reserves in our article As we mentioned, banks keep the ratio of their TL or foreign exchange deposits determined by the CBRT at the central bank as collateral. In addition, the central bank borrows money from banks through swaps. Therefore, all foreign currency accounts in the CBRT’s account are gross, and net reserves are reached when the required reserves and swaps of the banks are removed from these accounts.

How much were the CBRT’s reserves in 2020?

Total foreign exchange reserves, which received $ 107.8 billion in February, declined to $ 84.4 billion in May and $ 82.3 billion in November, the lowest level in recent years.

What is the current figure in total reserves?

The total reserves, which increased after November, were $ 95.2 billion as of February 26. Among the reserves, gold reserves were 40.7 billion dollars, and gross reserves were 54.5 billion dollars. Net international reserves were also $ 13.9 billion.

The calculations of some political party officials, economists and bankers for the loss in reserves in 2020 are about $ 50 billion minus, excluding swap, but the CBRT data does not contain a figure of this amount. The CBRT sends an open letter to the government in the event of a deviation of more than +/- 2% from the inflation target, and the center stated in the open letter in early February that there was a decrease in reserves in 2020:

In addition to global uncertainties, the deterioration of inflation expectations in the country caused the dollarization trend to gain strength. With the increase in capital outflows and the need for external financing, reserves decreased. In this period, the foreign currency and gold demand of the residents increased; The fact that gold imports exceeded their historical averages negatively affected the external balance. High volume of foreign capital outflows from portfolio and swap markets were observed due to the increase in macrofinancial risks and deterioration of expectations. Simultaneously, the strengthening of the domestic deposit dollarization and the acceleration of the real sector’s tendency to reduce their foreign currency liabilities increased the foreign financing need significantly. Thus, external imbalances caused by rapid growth driven by domestic demand increased country risk premiums and put pressure on exchange rates and reserves.

In his statement last month, President Erdogan stated that the decrease in reserves was due to the provision of price control, especially the exchange rate movement, and that this was done on legal grounds, and that the decrease in reserves was not a sum of 130 billion that was criticized. The official data of the center do not include negative levels in reserves, however, under all circumstances, trust is the most important factor in capital flow and it is obvious that developments in this issue during the year raise concerns about reserves.

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