Objectives of the SWAP agreement between Turkey and Azerbaijan

The Central Bank of Turkey and the Central Bank of Azerbaijan are preparing to sign a SWAP agreement. The contract value is 1 billion euros. This means that the Central Bank of Turkey, will receive the manat, and give the lira in return. In the future, a mutual exchange will be made with the payment of interest on the agreed day. In order to protect foreign exchange reserves, the CBA of Turkey enters into similar swap agreements with different countries. In 2018, during the depreciation of the Turkish lira, Turkey entered into dollar swap agreements with Qatar for 15 billion and with the UAE for 5 billion. It should be noted that the gold and foreign exchange reserves of the Central Bank of Turkey are negative -56.7 billion dollars.

Economists remember that expectations from a swap agreement with Qatar in 2018 did not materialize. The interpretation of this was presented to the public in a highly distorted form. Naturally, it was not about the provision of direct financial assistance in the amount of $15 billion. Qatar was not even supposed to provide a loan to Turkey. The agreement provided only for the purchase and sale of $3 billion.

Turkey has virtually no foreign exchange reserves. Central Bank $ is often referred to as the place of trust. Often referred to as a "lifeline", the $124 billion reserve of the Central Bank cannot be fully considered a reserve. For several reasons. I will try to explain a simple scheme of these reserves.

Turkey's foreign exchange reserves are only $124 billion. However, this does not mean that the Central Bank can freely take them and dispose of them as cash. By no means! The Central Bank has no right to dispose these funds. There are funds of citizens, depositors and banks. For example, if a citizen places a deposit of $100 in a bank, then as a reserve requirement, banks hold 5% of this amount in the Central Bank account as a guarantee. The rest is the funds of citizens and companies. In the banking system, this is called the required reserve ratio.

With these funds, Turkey must pay off its external debt (total $466 billion), and on the other hand, cover the so-called "current open" deficit. And private sector debt is $180 billion (in dollars). If to take into account the amount formed by the "current open" deficit of an average of 50-60 billion dollars, then the talks is a debt of 240-250 billion dollars. By the way, the concept of “current open” is an indicator of the difference between the currency leaving the country and the currency entering the country.

According to the criteria for assessing the countries of the world by risk groups, the current situation in Turkey makes it one of the most at risk. It has the status of a country more at risk than even Greece, reminiscent of a ship sinking among giant debt waves. If we evaluate the rating according to these criteria, then Greece will score 350 points, and Turkey - 500. This means that the country's economy is in a more critical situation than the crisis.

In my opinion, the Turkish government is unable to give a correct assessment of the economic situation in Turkey. They declare with confidence that Turkey will overcome such situations. They probably think that if Turkey managed to overcome this crisis in 2001, then it can easily get out of it now. But now is not the time. It is  necessary to correctly assess the characteristics and diagnosis of the crisis. During that crisis in Turkey, the risks of the state were great. The companies were strong and therefore, they were able to overcome the crisis. Then both public and private banks were in a good position. Now it's the other way around. Companies are heavily indebted and the private sector is weak. If they fail, it will be a big risk for Turkey.

If they fail to stop the recession, then  new investors will not come to Turkey,  and  those who have already come will leave it. Since 2015, there has been a significant decrease in the inflow of foreign investment. The remaining companies will not tolerate all this for a long time. Their age, level of capitalization and competitiveness are not enough to stay on the market for many years. There is poor management of the economy, the damage caused to the tourism sector by the pandemic, and, as a result, a sharp decline in state revenues. If this situation continues to deteriorate, 15-20% of Turkish companies may fail. This can give rise to such risks as the emergence of a new army of the unemployed, the aggravation of the criminal environment, and poverty. The 4 million Syrian refugee army could be the catalyst for this situation.

The reason for the current economic downturn in Turkey is not monetary policy, but the structure of the economy. The temporary strengthening of the Turkish lira resembles a temporary decrease in the patient's temperature with the help of a medicine.

The main goal of the swap agreement between Turkey and Azerbaijan is to neutralize inflationary factors that will intensify in the coming weeks and make anti-inflationary measures more effective. The main message of the Central Bank in this situation is also aimed at foreign investors. Because the Central Bank understands that foreign investors, as "carriers of the dollar", can strengthen the economy and the country's ability to earn income in dollars. Taking this into account, in my opinion, in the current situation it is necessary to keep under vigilant control two directions of actions in the Turkish economy. The first is to limit the outflow of dollars from the country through imports. Secondly, to expand the channels of receipt of dollars through exports.

Swap agreements are usually concluded with a state with which there are close and large-scale trade relations, an atmosphere of mutual trust reigns. Under this agreement, both parties undertake to pay various interest payments or exchange rates over a specified period of time. After that, they will be able to convert currencies.

Without a doubt, the main goal of this agreement is to express support for Azerbaijan in the monetary sphere against the backdrop of an increase in demand for the dollar in Turkey, to bring the Turkish lira out of the range of sharp fluctuations into the range of relative ones. In other words, this is a way to obtain, on the basis of mutual obligations, with the support of partner countries, dollars that production cannot create and earn.

This step of the Central Bank will send various impulses to the monetary sphere. Now the economic institutions responsible for the Turkish economy must launch the Central Bank's fire-fighting mechanism and pass the baton to other institutions. The economic team of the Turkish government, thinking about the sequence of linking fiscal policy with industrial policy, should be able to change the situation.

Mammad Talibli