Central Bank of Turkey Experiences $2.9 Billion Reservoir Depletion Following a Sequence of Five Successive Profits
In the week ending August 1, Turkey witnessed a decline in foreign exchange and gold reserves held by the Central Bank, while consumer credit saw a significant increase.
Despite a drop in reserves, foreign investors continued to buy equities for a sixth consecutive week, with the total stock of equities held by non-residents rising from $32.92 billion to $33.27 billion. This trend suggests a continued confidence in the Turkish market, despite ongoing economic challenges.
The total foreign currency deposits in the banking system amounted to $231.03 billion, but a 1.4% decrease was observed, with foreign currency deposits dropping to ₺7.77 trillion. Concurrently, domestic residents' consumer loans rose by 2.5% to ₺4.82 trillion, indicating a growing reliance on credit to manage financial pressures caused by high inflation and credit constraints.
The decrease in foreign exchange and gold reserves can be attributed to the Central Bank's active management of liquidity and currency stabilization. The Bank has been cutting interest rates aggressively, aiming to stimulate economic activity despite persistent inflation risks. This monetary easing can lead to increased demand for credit and pressure on reserves.
To defend the Turkish lira, the Central Bank often intervenes in currency markets, using its foreign exchange and gold reserves. This intervention, alongside controlling liquidity via reserve requirements and FX controls, can result in a drawdown of reserves during periods of currency volatility and policy adjustment.
The Banking Regulation and Supervision Agency (BRSA) recently expanded support for credit card holders by allowing retail consumer loans and credit card debt restructuring over longer periods (up to 48 months). This policy boosts consumer credit usage as the public relies more on borrowing due to inflationary pressures and tighter monetary policies restricting credit availability.
Government fiscal challenges, including higher-than-anticipated budget deficits and automatic tax rises, put further pressure on disposable incomes, pushing households toward greater reliance on consumer credit.
In summary, the decrease in foreign exchange and gold reserves reflects the Central Bank's interventions to stabilize the currency and manage liquidity amid easing monetary policy and inflation. The increase in consumer credit is driven by expanded regulatory support and economic conditions causing higher consumer borrowing needs in Turkey as of early August 2025.
The total central bank reserves in Türkiye declined to $168.99 billion in the week ending August 1, a drop of nearly $2.9 billion from the previous week's $171.85 billion. Lira-denominated deposits also declined by 1% to ₺13.58 trillion. It's worth noting that $192.26 billion of the total foreign currency deposits belonged to domestic residents.
Non-resident investors purchased $135.5 million worth of equities in the week ending August 1, while they also bought $8.8 million in government domestic debt securities (GDDS) and $61.2 million in non-government sector bonds. The banking sector's total deposits decreased by ₺248.14 billion ($6.1 billion) during the week, and net reserves excluding currency swaps also declined, from $46.7 billion to $45.6 billion during the same period. The drop in reserves reflected a decrease in both foreign exchange and gold reserves.
Erdogan's government is facing financial challenges as the total central bank reserves in Turkiye declined to $168.99 billion in the week ending August 1, a drop of nearly $2.9 billion from the previous week, exemplifying a strain on the Turkish finance sector. The increase in consumer credit, despite the drop in foreign exchange and gold reserves, suggests a growing reliance on credit by domestic residents to manage financial pressures caused by high inflation and credit constraints. Despite ongoing economic challenges, foreign investors continue to buy Turkish equities, highlighting a continued confidence in the Turkish market. Turkish businesses may find it challenging under these economic conditions as the decline in foreign currency deposits can put pressure on their liquidity and operational costs due to the devaluation of the lira.
