How realistic are Ankara’s hopes of negotiating Turkish liras?

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Ankara’s longstanding ambition to expand the use of the Turkish lira in foreign trade was back on the agenda this week as President Recep Tayyip Erdogan held talks with his Russian and Iranian in Tehran, reigniting debates over whether trading in the local currency is a viable prospect or just wishful thinking.

Since Russia and Iran provide the bulk of Turkey’s energy needs, leading to major imbalances in mutual trade, Ankara’s desire to negotiate in local currencies is understandable. The same is true for trade with China, which is a major supplier of capital goods and industrial inputs for Turkish manufacturers.

Erdogan’s government faces growing foreign currency crisis and read it beaten keep falling. After losing 44% of its value in 2021, the lira has fallen 25% this year and inflation has soared to almost 79% amid economic difficulties fueled by controversial rate cuts last year. The dramatic depreciation of the currency has further reduced the attractiveness of trading in liras, and runaway inflation is making it even more difficult, if not impossible, to find partners willing to trade in local currencies.

However, this has not stopped Erdogan from promoting trade in local currencies, especially with Russia, Iran, China and the Gulf countries.

Hit by Western sanctions, Iran and Russia have also sought to boost trade in local currencies. On June 19, the day the presidents of Turkey, Iran and Russia met in Tehran, the Iranian Currency Exchange started the trade in the rial-ruble pair, with about 2 million rubles sold for more than 10 million rials in initial transactions, according to Iranian media. The governor of the country’s central bank, Ali Salehabadiexpressed hope that trade volume would increase down the road, hailing the move as an important step in strengthening economic ties with Russia and fighting against global currencies such as the dollar and the euro, which, he said, have become “political tools of domination”. ”

In the case of Turkey, little progress has been made, even though Erdogan’s government has continued to raise the issue over the years, frequently testing the waters with Russia, Iran and China and even propose an Islamic megabank and trade in local currencies between Muslim countries.

According official data, Turkish buyers paid in lira only 3.8% of the country’s nearly $146 billion in imports in the first five months of the year, while payments in dollars and euros accounted for 71% respectively. % and 24%. Similarly, only 2.8% of Turkey’s $102.5 billion in exports over the same period were invoiced in lira, while 49.5% were in dollars and almost 46% in euros. Moreover, a significant part of lira payments represent transactions between companies based in Turkey and their branches in EU countries.

Promoting trade in local currencies has also been the stated goal of a series of currency swap agreements that the Turkish Central Bank has concluded with its Chinese, Korean and Gulf counterparts. A catch-all phrase in official announcements of the agreements reads as follows: “The main objectives of the agreement are to facilitate bilateral trade in the respective local currencies and to support the financial stability of the two countries”.

Official foreign trade statistics, however, show that swap agreements have had little impact on the expansion of trade in local currencies.

Foreign funds obtained through exchanges amounted to around $21 billion at the end of 2021, most of it coming from a deal with Qatar. The initial limit of the 2018 agreement was equivalent to $5 billion and was tripled to $15 billion in 2020. However, bilateral trade in local currencies has remained anything but symbolic. In the first five months of the year, Turkish import payments in Qatari riyals amounted to only $134 and Turkish exporters received Qatari riyals for goods worth only around $4,000, according to official records.

The Trade Facility with China, initially signed in 2012, was later renewed and raised to 46 billion Turkish lira and 35 billion Chinese yuan in June 2021, which was equivalent to around $6 billion at the time. The yuan was used to pay for only $212,000 of Turkish imports and around $10,300 of Turkish exports in the first five months of the year.

As for the agreement with South Korea, agreed in August 2021 for the exchange of local currencies equivalent to approximately $2 billion, it has yet to mark bilateral trade. According official dataneither Turkish importers nor exporters used the South Korean won during the first five months of the year.

The latest swap deal was signed in January with the United Arab Emirates for the equivalent of some $5 billion. The use of the Emirati dirham remains insignificant in bilateral trade, amounting to $21,000 in payments made by Turkish importers and $13,000 in payments received by Turkish exporters in the first five months of the year.

In short, the declared objective of facilitating exchanges in local currencies has remained almost a dead letter. For Turkey, the swaps effectively served to hide the central bank’s depleted foreign exchange reserves by inflating the gross figure.

As for the Turkish lira, it clearly has no chance of reducing international trade as long as it continues to fall amid inflation galloping towards triple digits, no matter how persistent Ankara is in pushing forward. the question.

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