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How turkey ate up forex resevers?

Turkey’s economy has been in turmoil for the past few years, and one of the major reasons for this is the depletion of its foreign exchange reserves. The country’s reserves have been shrinking since 2014, and the situation has worsened in recent years. In this article, we will explore the reasons behind this depletion and the impact it has had on the Turkish economy.

Foreign exchange reserves are an important component of a country’s economic arsenal. They are the foreign currencies and assets held by a central bank to support the value of its domestic currency and ensure financial stability. These reserves are used to pay for imports, service foreign debt, and intervene in currency markets to stabilize the exchange rate.

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Turkey’s foreign exchange reserves peaked at $135 billion in 2013. However, since then, they have been on a downward trend, and by August 2021, they had fallen to just $41 billion. This sharp decline has raised concerns about Turkey’s ability to repay its foreign debt, attract foreign investment, and maintain its financial stability.

There are several reasons why Turkey’s foreign exchange reserves have been dwindling. One major reason is the country’s current account deficit. This is the difference between the value of a country’s imports and exports. Turkey has been running a large current account deficit for many years, which means that it is importing more than it is exporting. This has put pressure on the country’s foreign exchange reserves as it has to use them to pay for imports.

Another reason behind the decline in Turkey’s foreign exchange reserves is the country’s heavy reliance on short-term foreign borrowing. Turkey’s private sector has borrowed heavily in foreign currencies, which has increased the demand for foreign exchange. As a result, Turkey’s central bank has had to sell its foreign exchange reserves to meet this demand.

Furthermore, Turkey’s political and economic instability has also contributed to the depletion of its foreign exchange reserves. The country has been facing frequent elections, political unrest, and security threats, which have deterred foreign investment and led to capital flight. This has put further pressure on the country’s foreign exchange reserves.

The depletion of Turkey’s foreign exchange reserves has had a significant impact on the country’s economy. One of the main consequences has been the depreciation of the Turkish lira. As the country’s foreign exchange reserves have declined, the value of the lira has fallen sharply against major currencies such as the US dollar and the euro. This has made imports more expensive, leading to higher inflation and a decline in consumer purchasing power.

The depreciation of the lira has also made it more difficult for Turkey to service its foreign debt. As the value of the lira has fallen, the cost of servicing foreign debt denominated in other currencies has increased. This has raised concerns about Turkey’s ability to repay its debt and has led to a downgrade in the country’s credit rating by major rating agencies.

In addition to these economic challenges, the depletion of Turkey’s foreign exchange reserves has also had political implications. It has weakened the government’s ability to respond to economic crises and has eroded public confidence in the government’s economic policies. This has led to social unrest and political instability, which could have long-term consequences for Turkey’s economic development.

In conclusion, the depletion of Turkey’s foreign exchange reserves has been a major challenge for the country’s economy. The decline in reserves can be attributed to a combination of factors, including the current account deficit, heavy reliance on short-term foreign borrowing, and political and economic instability. The consequences of this depletion have been significant, including the depreciation of the Turkish lira, higher inflation, and a decline in consumer purchasing power. The situation has also raised concerns about Turkey’s ability to service its foreign debt and maintain its financial stability.

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