ANKARA (Reuters) - Turkey’s Treasury ministry is working on legislation to transfer the central bank’s 40 billion lira ($6.6 billion) in legal reserves to the government’s budget to shore it up, three economic officials told Reuters.
The budget deficit is deeper than expected, said the sources, who requested anonymity because they were not authorized to speak publicly. It was unclear when or whether the draft law would reach parliament, though one of the sources said it would happen “soon”.
If enacted, the transfer would mark the latest unorthodox attempt by President Tayyip Erdogan’s government to pull Turkey out of recession and steady the lira following last year’s currency crisis.
The lira has come under renewed pressure in the past two months partly due to investor worries over the central bank’s depleted foreign exchange reserves. These are separate to the “legal reserves” and help defend it against another crisis.
The “legal reserves” are what the central bank sets aside from profits by law to be used in extraordinary circumstances. At end-2018, they stood at 27.6 billion lira, according to the bank’s balance sheet data.
A second source with knowledge of the matter said last year’s “legal reserves” combined with this year’s amounted to the 40-billion lira figure, which was cited by all three people who spoke to Reuters.
“The Turkish central bank has around 40 billion lira in legal reserves. The transfer of this amount to the 2019 central administration budget was seen as suitable. This step aims at improving and strengthening the budget,” the second source said.
In response, the lira slid to its weakest level on Monday at 6.1175 against the dollar. The currency has all but erased gains from late last week when, in another unusual move, state banks sold billions of dollars to support the lira.
It remains unclear how large a tranche of the reserves would ultimately be transferred and what, if any, new requirements would apply to the central bank. Central bank and Treasury ministry officials could not immediately be reached for comment.
The transfer would mark the second recent move by Ankara to tap the central bank’s funds to boost its budget. In January, the bank transferred some 37 billion lira in profits to the Treasury three months earlier than scheduled.
“I do not remember the use of legal reserves before. This method came up to stop further deterioration of the budget,” the first source said.
“There needs to be legislation to transfer the central bank’s legal reserves. The new legislation is planned to be presented to the parliament soon,” the source said.
Despite the January boost from central bank profits, Turkey’s budget recorded a 36.2 billon lira deficit in the first quarter of 2019, Treasury and Finance Ministry data show. The deficit is expected to reach 80.6 billion lira by year-end.
Tax cuts and additional state spending ahead of nationwide local elections on March 31 have weighed on Turkey’s budget.
The vote, which resulted in losses for Erdogan’s AK Party in some big cities, was annulled last week in Istanbul and will be re-run on June 23, opening the door to possibly more fiscal stimulus.
The transfer plan sends a message “that things are worse than first assumed, (and) that the fiscal tightening we expected post March 31 local elections is being put off likely beyond the June 23 local election date,” said Timothy Ash, head of emerging market research at Blue Bay Asset Management.
The Turkish lira has fallen some 40 percent since 2017.
Fitch Ratings agency earlier this month reaffirmed Turkey’s ‘junk’ sovereign rating with a negative outlook and said in a report at the time it “assumes policy will be tightened as election-related stimulus rolls off”.
Additional reporting by Ezgi Erkoyun; Writing by Jonathan Spicer; Editing by John Stonestreet and Gareth Jones