Duran Bülbül: The increase in gross reserves is a short-term bandage, it only covers the wound

The Weekly Money and Bank Statistics were published by the CBRT. Accordingly, as of December 15, the Central Bank's gross foreign exchange reserves increased by 890 million dollars to 95 billion 399 million dollars. Gross foreign exchange reserves stood at 94 billion 509 million dollars on December 8. During the same period, gold reserves also increased by 265 million dollars, rising from 46 billion 864 million dollars to 47 billion 129 million dollars.

Thus, the Central Bank's total reserves reached an all-time high of 142 billion 528 million dollars in the week of December 15, an increase of 1 billion 154 million dollars compared to the previous week, up from 141 billion 374 million dollars.

The increase in total reserves from the end of May to the week ending December 15 amounted to 44 billion 70 million dollars, corresponding to an increase of 44.8 percent.

Economist and Finance Expert Prof. Dr. Duran Bülbül stated the following in his explanation to 12punto.com.tr:

The Central Bank management's increase in interest rates has naturally increased gross reserves. What matters is not the increase in gross reserves, but the increase in net reserves. Due to this interest rate hike, there has been a partial inflow of hot money into Turkey. With this interest rate hike, assets have also appreciated. All instruments have appreciated, and because they added value, this has naturally been reflected in the Central Bank's reserves. There is an increase of around 44.1 billion here. It is important to look at how much of this increase is a net increase and how much is borrowing. If this increase occurred due to hot money inflows resulting from borrowing, it has further increased the negative reserves in terms of net reserves. To make a more sound interpretation, one needs to look at how much of this gross increase has become net reserves, and when we look at the Central Bank's balance sheets, we cannot see that increase in net reserves at the moment. They actually need to explain this. Therefore, it must be said that the increase in all assets and Central Bank reserves is a natural result of the interest rate hike.

Due to the increase, assets in the market have also been revalued. However, the result of these revaluations has been reflected in the Central Bank's balance sheets as gross reserves. Yet, this rise in the policy rate, especially the rise in the policy rate followed by the Central Bank, has also increased the interest of hot money in Turkey. Because of this increase, if this gross reserve increase is actually mostly hot money, it is already borrowing. Since it is borrowing, net reserves will evolve further toward negative reserves, and negative reserves will grow even more. Therefore, it is very difficult to write a success story or call this a success story. The point to be noted here is this: the Central Bank's negative reserves were already over 55 billion. Net liabilities were also over 58 billion. Now, looking at it from this perspective, the problem here is that as long as negative reserves grow, the fact that gross reserves have increased does not mean anything, and it will not have a positive reflection in economic terms.

If net reserves are also increasing along with the increase in the Central Bank's gross reserves, this is extremely meaningful. However, when we examine the Central Bank, there is no explanation regarding the increase in net reserves. One of the most fundamental reasons for the increase in gross reserves here is that the policy rate has risen in the recent period. With the rise in the policy rate, the appreciation of assets and instruments valued with interest in Turkey, and another problem is the increased interest of hot money. If the interest of hot money has already increased, this is already borrowing. Since it is borrowing, this will further increase the Central Bank's negative reserves, not shrink them. Therefore, it must be said that the fundamental way to see a positive scenario from now on is for net reserves to increase; a policy that does not increase net reserves is not sustainable and is unsustainable in the long run. However, the fact that it has increased gross reserves is a short-term bandage. It does not treat the wound in the short term; we only temporarily cover the wound.