Türkiye's central bank on Wednesday announced it had ended a deposit transaction with Saudi Arabia, a move that reflects authorities' growing confidence in rebuilding foreign exchange reserves without relying on debt from affluent allies.
Saudia Arabia had deposited $5 billion before Türkiye's presidential and parliamentary elections last year, which marked a sharp turnaround in policymaking as authorities reversed years of loose policy and delivered aggressive tightening, mainly to cool stubbornly elevated inflation.
The Central Bank of the Republic of Türkiye (CBRT) repaid the deposit to the Saudi Fund for Development (SFD) on Tuesday, according to bankers' calculations, citing its balance sheet data released on Wednesday.
The termination of the transaction comes as the bank has been reviewing its international deposit transactions. In a statement, it said the move is part of efforts to reduce Türkiye's external liabilities as part of reserve management.
"Our external liabilities have recently improved by approximately $7 billion through the reduction of deposit balances," the bank said.
The bank's deposit balance under external liabilities has decreased to approximately $16 billion, while the total amount of swaps conducted with other central banks stands at around $23 billion, according to bankers' calculations.
More than a yearlong tightening drive has significantly improved investor sentiment and led to strong demand for Turkish assets, a shift that has helped the CBRT rebuild its foreign exchange reserves at a record pace.
"Our reserves have strengthened as a result of the increased influx of foreign resources, dollarization reverse and reduced external financing needs resulting from our (medium-term economic) program," said Treasury and Finance Minister Mehmet Şimşek.
"Consequently, we are reducing external liabilities," Şimşek wrote on social media platform X.
"Our economic and financial cooperation with Saudi Arabia will continue."
Since June last year, the central bank has raised its benchmark policy rate by a total of 4,150 basis points to 50% to combat inflation, which has begun what is expected to be a sustained fall, having dipped to 71.6% in June.
It last raised interest rates in March by 500 basis points and has since held steady while vowing to tighten policy more if it predicts the inflation outlook will worsen, a hawkish pledge it repeated on Tuesday.
Most analysts expect rate cuts to begin before year-end, though some expect the central bank will wait longer.
The bank accumulated around $80 billion in reserves after the local elections in March.
Its net reserves, excluding swaps with commercial lenders, reached approximately $15 billion as of early July. They had hit a record low of minus $65.5 billion before the elections.
Earlier this month, CBRT Governor Fatih Karahan told Bloomberg that the bank has largely eliminated swaps with domestic banks and was reviewing deposit agreements with international counterparts.
A document sent to banks on Tuesday showed the CBRT is to start swap auctions selling foreign currency and gold against Turkish lira with local lenders.
The central bank said it was launching the swap auctions to implement lira sterilization – the bank's term for regulating excess liquidity.
Earlier on Tuesday, the central bank said liquidity conditions were being closely monitored and added that sterilization would be implemented whenever needed.
The volume of the bank's swap transactions with local lenders, which hit a high of $64.5 billion before the presidential elections last year, fell to some $140 million this week.
"Within the framework of the monetary policy, it has been decided to start sell-side Turkish lira swap auctions in order to diversify the sterilization tools," the document seen by Reuters said.
Launching sell-side FX and gold swap auctions will cause a change in reserve calculations and have a significant impact on lira liquidity in the market, according to bankers.
As of this Monday, lira liquidity excess in the banking system, which occurred mainly due to the central bank's efforts to increase the currency's share in the system, stood at TL 200 billion ($6.09 billion).
