Is this how you gain credibility for the Turkish Lira?

Last Thursday, Central Bank Governor Fatih Karahan announced the third Inflation Report of the year. He kept the annual inflation target at 24 percent but announced that they estimate the actual inflation will be 28 percent. It is a somewhat strange situation, but we have become accustomed to this absurdity because we have witnessed the Central Bank failing to meet its inflation targets for years.

For me, the most important question of the meeting came from economist İris Cibre. Cibre reminded that the short-term money held by domestic and foreign investors in TL has reached 132 billion dollars in a high-interest environment and asked:

“In the event of a new war or a black swan event, does the Central Bank have a preparation for this if these resources head towards an exit? Do you evaluate this 132 billion dollar level as a dependency from the Central Bank's perspective?”

The question is clear: What will the Central Bank do if the 132 billion dollars of short-term TL assets turn to foreign currency in a moment of crisis?

Fatih Karahan answered as if something else had been asked:

“Frankly, I find it difficult to understand why the increase in the share of local currency in this country is evaluated as a risk.”

He continued by saying the following:

“In an economy where the financial system functions healthily and there is trust in economic policies and the local currency, it is expected that this ratio would be high... Despite all the shocks, we see that the TL share has not decreased, but on the contrary, it has increased. This actually shows that trust in policies has increased. I see this not as a risk factor, but as a success factor.”

Well, Mr. Governor, that is not the question you were asked... No one is asking whether it is good or bad for the Turkish Lira's share in the financial system to increase. What will you do if 132 billion dollars of short-term TL assets turn to foreign currency in the event of a shock?

Trust in the Turkish Lira has increased... And this is a success factor...

If you provide one of the world's highest interest rates and make the Turkish Lira one of the world's most attractive investment vehicles for hot money, of course, the money will come. Why wouldn't an investor who gets a return in Turkey that they cannot get in other countries come?

Is this what you call trust in the Turkish Lira?

The nation pays the interest on hot money

In my article on July 19, I shared a compilation I made from the Central Bank's balance of payments accounts.

In the 2018-2022 period, the interest and portfolio income payment made to the outside world was an annual average of 11.1 billion dollars.

In the 2023-2025 period, when Mehmet Şimşek returned to office, it jumped to 19.8 billion dollars. An increase of approximately 78 percent. In 2025, the interest and portfolio income we paid abroad reached 24.7 billion dollars.

While Turkey was transferring an average of around 11 billion dollars in interest and portfolio income to the outside world annually, you increase this to 24.7 billion dollars; then you present the money coming to Turkey due to high interest as “an indicator of increased trust in the Turkish Lira and a success factor.”

The bill is not limited to the resources transferred abroad. Before the transition to the presidential system, the share of interest payments in the budget in 2017 was 8.4 percent. It soared to 14 percent in 2025. In the first five months of 2026, it reached 17 percent. High interest has such a cost as well.

The money going to interest does not fall from the sky. It comes out of the taxes paid by the nation.

The cost of the İmamoğlu shock

The question asked to the Central Bank Governor was “are you prepared for a shock situation?”

Following the political shock that began with the detention of Ekrem İmamoğlu on March 19, 2025, the Central Bank had to sell nearly 50 billion dollars in foreign currency within about a month.

Additionally, before March 19, the two-year benchmark bond interest rate was at the 38.3 percent level. After the shock, it rose to over 47 percent. An interest shock of approximately 9 points...

The cost of the political crisis was not just the 50 billion dollar foreign currency sale. The Treasury's borrowing cost also jumped all of a sudden.

More interestingly, the picture today.

In March 2025, annual inflation was 38.1 percent, and the two-year Treasury interest rate was 38.3 percent. The interpretation is this: Inflation and interest are neck and neck. The market is hopeful that inflation will fall...

Today, annual inflation has fallen to 31.75 percent, but the two-year Treasury interest rate is around 41.5 percent. An interest rate 10 points above inflation. The market has realized that inflation will not fall.

While inflation is falling by 6.35 points, the state's borrowing interest rate is still 3.3 points higher than it was before the İmamoğlu operation.

This picture shows not that trust in the Turkish Lira has increased, but that those who lend to Turkey are demanding a higher risk premium. I am not saying this; the market is saying it.

Attack on Iran and Absolute Nullity

On February 28, 2026, the Iran war began with a US-Israel attack. The Central Bank had to sell approximately 26 billion dollars in foreign currency within a few weeks. The interest rate on the two-year Treasury bond rose from the 36 percent levels before the war toward 40 percent.

Then came the internal political and judicial shocks. In the week when the absolute nullity decision shook the market, foreign currency sales reached approximately 7 billion dollars, and bond interest rates rose again.

We have experienced all of these.

At the end of March 2025, when the Ekrem İmamoğlu operation took place, the central government debt stock was 10 trillion 271 billion liras. By the end of June 2026, it rose to 14 trillion 993 billion liras.

In round numbers, 15 trillion liras.

The interest rate increase is now working on a debt stock approaching 15 trillion liras. The entire debt is not repriced at the same time, but as maturities arrive, old debt is rolled over at a high interest rate.

Therefore, the cost of political risk does not remain as a one-week stock market or exchange rate movement. It turns into Treasury interest expenses spread over years.

First bring it in with high interest, then sell the reserve

There is a strange cycle at play.

First, you bring foreign currency into the country by offering high interest.

You accumulate reserves with this foreign currency.

When a political crisis arises, you spend tens of billions of dollars of the reserve.

The same crisis raises the Treasury's borrowing interest rate.

To rebuild the reserve and trust you lost, you have to offer high interest again.

This time, both the Treasury's interest expense at home and the interest transfer made abroad grow.

Then you turn around and say, “The share of the TL has increased. This shows that trust in policies has increased. I see this not as a risk factor but as a success factor.”

This is not how you gain credibility for the Turkish Lira

You cannot gain credibility for the Turkish Lira by offering one of the world's highest interest rates.

For the true credibility of the Turkish Lira, you need inflation at the 3 percent level, a sustainable budget, an economy that does not produce a current account deficit but even gives a current account surplus, stable growth, the rule of law, separation of powers, and state institutions working with merit.

Of course, a Central Bank Governor cannot provide all of these alone. This is a matter of state.

Possible shocks

Possible shocks in Turkey are not limited to geopolitical risks in the Middle East. Today, the possibility of the removal of the immunity of New Party Chairman Özgür Özel and even his arrest is being discussed in public opinion. I hope something like this does not happen.

The size of the skittish money currently sitting in short-term TL is 132 billion dollars.

The problem is not limited to this either.

Turkey's external debt maturing within the next year is 242 billion dollars. Together with an annual current account deficit of approximately 39 billion dollars, the gross external financing need is 281 billion dollars.

In contrast, as of August 7, the CBRT's gross reserves are 178.4 billion dollars, and its net reserves excluding swaps are only 50.6 billion dollars.

Of course, it is not necessary for the entire 281 billion dollars to be met from reserves. Under normal conditions, debts are rolled over, and the current account deficit is financed by capital inflows.

But if, in a shock, the money in TL turns to foreign currency, the rollover ratio of external debts falls, and the financing of the current account deficit becomes difficult at the same time, the Central Bank will remain under pressure from three fronts.

Moreover, the central government debt stock has reached 15 trillion liras. It is also necessary to take into account the interest pressure that will be placed on top of this.

Therefore, the question asked to the Central Bank Governor is still on the table:

What will you do if a significant portion of this money turns to foreign currency in a new political, legal, or geopolitical shock?

I hope the answer “trust in the Turkish Lira has increased” is not a message to the political authority saying “You can carry out operations as you wish.”

Otherwise, we may find ourselves longing for the shocks we have experienced in the recent past.