Turkey, hit by runaway inflation and rampant weakness of the lira, is expanding bilateral currency cooperation to support its national currency.

On Wednesday, the Turkish central bank announced the conclusion of a swap agreement with the central bank of the United Arab Emirates (UAE).

It was closed for three years and amounts to almost five billion dollars.

Central Bank Governor Şahap Kavcıoğlu said it shows the will to "deepen bilateral trade in local currencies to advance economic and financial ties between our countries."

Andreas Mihm

Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.

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Swap transactions support local currency trading and increase the central bank's gross reserves.

According to official figures, these in Turkey on January 7 amounted to almost 110 billion dollars.

However, analysts pointed out that they are negative if you subtract receivables from swap and commercial lending transactions.

Reconciliation pays off

Turkey already has swap deals worth about $23 billion with China, Qatar and South Korea, and another "overdraft facility" is being negotiated with Azerbaijan, an oil and gas supplier.

The one with the UAE follows a political reconciliation of the long-estranged states. Crown Prince Abu Dhab only visited Istanbul in November.

It's now paying off.

The lira fell more than 44 percent against the dollar in 2021. According to economists, one reason for this is the low interest rate policy that President Recep Tayyip Erdoğan is forcing the central bank to adopt. It has lowered the key interest rate to 14 percent, even though inflation is at 36 percent, which put additional pressure on the lira. No change in interest rates is expected from the first meeting of the FOMC this Thursday.

In order to support the lira exchange rate, the central bank bought lira for 7.2 billion dollars in December.

After the rapid decline to up to 18.4 lira per dollar could not be stopped, the government relied on a new instrument and promised investors state insurance against potential currency losses if they kept their money in local currency instead of foreign exchange or money .

The program, which was initially only open to private investors, has since been expanded to include business accounts.

The state promises the lenders to pay calculated currency losses in the investment period of 3 to 12 months from the budget.

Bank advisors encourage lira investments

As a result, the lira had gained again and has since been below 14 lira per dollar, on Wednesday it was quoted at 13.60 lira per dollar and 15.40 lira per euro.

Erdoğan expressed his satisfaction with the stabilization.

More will be done "to maintain stability in the financial markets and to increase interest in the lira."

According to Finance Minister Nureddin Nebati, by the end of last week 300,000 customers had paid almost $10 billion into the new lira accounts.

15 percent of this is said to have come from foreign currency accounts.

According to a Reuters report, investment advisors specifically encourage customers to exchange.

State banks offer up to 19 percent, private banks up to 26 percent interest on lira investments that come from foreign currencies. 

Finance Minister Nebati is also spreading good news: by the time the president is elected in the middle of next year, inflation will be back in the single digits.

However, analysts are currently expecting an increase to 50 percent.