What happened to Turkey’s US$128 billion?

Where did the US$128 billion go? This question has been on the minds of Turkish people these days. It is certainly a substantial amount of money, by any standard.

The figure refers to the reserves sold in 2019 and 2020 by the Central Bank to support the Turkish lira in foreign exchange markets. The opposition’s allegations that these funds are unaccounted for makes the biggest financial scandal in Turkey.

The amount is beyond the imagination of Turkish people trying to make ends meet, who have received barely any financial assistance during COVID-19 pandemic. To help comprehend the size of the alleged financial loss, one of the opposition parties, CHP, created a website where people can “play” with the amount by purchasing airports, toll roads and precious minerals – which people find difficult to lose, even in a game.

Even though ‘US$128 billion’ has been trending in public debates, various calculations have been made by financial policy experts. Economist Mustafa Sönmez came up with the figure of US$125.7 billion, while another expert, Kerim Rota, disclosed his calculations as US$126.3 billion.

President Erdoğan has said the actual amount was at US$165 billion, but vehemently disagreed with critics that it was gone or stolen and said the Central Bank reserves were not lost, but “changed hands”.

Naturally, every dime counts; especially at a time of an economic fallout brought by the pandemic. If one thing is for certain, the Central Bank has yet to offer a full explanation and publish data with a detailed account into the transactions.

A search on the Turkish Parliament website shows that members of the parliamentary opposition have issued 25 official questions – all of which have remained unanswered thus far.

Authorities, from the Central Bank Governor to the Minister of Finance and all the way to President Erdoğan, have been dismissive. Initially, they denied the allegations altogether and accused critics of playing into games plotted against Turkey by foreign actors, amounting to acts of treason. Recent remarks appear to confirm that the transactions took place but frame it as a standard measure taken by the Central Bank.

Nevertheless, expert assessments point to possible “back-door” deals and the erosion of Central Bank’s independence.

Transactions by the Central Bank are supposed to be conducted in a transparent manner and currency sales should be disclosed to the public. Indeed, Central Bank’s similar sales in previous years had always been conducted through a tender, and the Bank published key information to their website.

In response to public pressure and in attempts to justify the sale, the authorities referred to an earlier protocol made by the Central Bank and the Treasury. However, the legal status of such a protocol is also questionable as it cannot override the law, which clearly sets the responsibilities of the Bank.

A number of questions still seem to be outstanding, starting with the exact amount of the reserves sold, on the ways the sale took place and on what legal grounds. Next, it is important to disclose publicly who the reserves were sold to and at what price. The actual damage and what the proceeds are used for also need clarifying. In one of the interviews, Minister of Finance said he is in favour of transparency and disclosing all the data in order to end misinformation, by impliedly pointing a finger to his predecessor and passing the buck to the Central Bank, which has not commented on these particular questions. Berat Albayrak – Erdoğan’s son-in-law and the Minister of Finance at the time of these transactions – has, too, slammed the critics.

According to financial experts, it appears that the Treasury requested the sale of reserves from the Central Bank whenever there is a need for keeping Turkish Lira exchange rate stable against the US dollar. Then, the Central Bank may have sold the requested funds to the Treasury from the “back door”, which in return sold it to the public banks, which then resulted in sale to markets and swap transactions. The purpose of the transactions was explained as to maintain the financial outlook high and trust with the Turkish markets.

This is a political issue as much as financial. Transactions started in February 2019, just before the municipality elections of two years ago, indicating a strong electoral motive behind it. This went on until November 2020, when the previous Minister of Finance, Berat Albayrak, resigned and when this questionable practice seemingly stopped.

The question of Central Bank’s independence lies at the heart of the issue. By law, Central Bank is an independent institution in setting up and implementing its policies and endowed with relevant mechanisms and financial instruments for doing so. President Erdoğan, on the other hand, has long been known for his dissatisfaction with the practices of Central Bank with regards to high interest rates and, at the same time, wanting to keep Turkish lira stable against foreign currencies. However, the sudden dismissal of the last Chair of Central Bank on 19 March after less than five months on the job may have caused another plunge on the value of Turkish lira and seen as a setback to the independence of the bank. Turkey now has its fourth Central Bank chief in less than two years. This suggests that the independence of the Central Bank has eroded over the years.

Pressure by the government on the Central Bank and increase of control over state institutions not only greatly damage the country financially but also limit horizontal accountability of the institutions in the long run. A National Integrity System Assessment conducted by Transparency International Turkey already indicated that of the 15 institutions assessed, 11 were classified as “weak” and only four were rated as “moderate”.

Weak institutional state structure is clearly a systematic challenge for Turkey and is a result of failure to adequately separate powers and keep the executive in check. The story is a perfect example of how erosion of institutions, lack of transparency and accountability can hurt a country.