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Turkey’s swap deal with the UAE is a boost, but won’t solve the lira’s underlying problems

ANKARA: At a time when Ankara is in search of foreign resources and facing unprecedented rates of inflation, the currency swap agreement between Turkey and the United Arab Emirates is a much-needed confidence boost for the economy of the country.

However, analysts have warned that this deal alone will not solve the underlying problems facing the lira.

The two nations signed a three-year deal worth $4.9 billion, including financial and trade relations.

Securing foreign swap lines should fuel Turkey’s much-needed foreign currency reserves.

“While this is a good long-term vote of confidence in the Turkish economy, the currency swap will not get to the root of Turkey’s economic challenges. Many of these challenges relate to unconventional economic policy decisions,” Robert Mogielnicki, senior resident fellow at the Arab Gulf States Institute in Washington, told Arab News.

According to Mogielnicki, the currency swap puts money behind recent efforts to improve strained relations between the UAE and Turkey.

“The UAE is likely interested in using the currency swap to better position Emirati companies and investors to engage in Turkish markets as well as support foreign policy objectives,” he said.

Noting that cross-currency swaps reduce reliance on a third currency and thereby avoid fees resulting from exchange rate volatility and transfer costs, Mogielnicki said the move paves the way for increased trade and investment between the countries.

“The wider MENA region probably won’t be worse off because of the currency swap, but I don’t see this deal as particularly important for the region,” he added.

Enver Erkan, the chief economist of Tera Investment in Istanbul, hails the swap agreement with the United Arab Emirates as a positive step towards increasing the gross foreign exchange reserves held by the Turkish Central Bank.

“In contrast, we also look at the economic landscape in terms of net reserves excluding swaps. While net reserves are around $8 billion in the current circumstances, there is a negative picture of minus $56 billion in net reserves excluding swaps,” he told Arab News.

Talks between the Turkish central bank and its Azerbaijani counterpart on securing a possible currency swap line are also underway.

Swap agreements are mainly used by countries that have large-scale commercial relations with each other to finance part of these relations to be paid in local currencies.

Turkey has already concluded swap deals with China, Qatar and South Korea worth around $23 billion.

With this latest currency swap agreement, the Turkish Central Bank’s total swap figure with foreign central banks reached $28 billion.

The swap agreement with China in 2012 and subsequent agreements allowed Turkish companies to pay for imports from China in yuan.

The agreement between the Turkish and Emirati central banks will be valid for a period of three years, with the possibility of being extended.

Emre Peker, European director of political risk consultancy Eurasia Group, believes the swap deal will not have a significant impact on the Turkish economy, but will help Turkish companies trade with the UAE on margins.

“It won’t be a game-changer, but will alleviate some financial pressures, given that the exchange covers Turkey’s average annual exports to the UAE,” he told Arab News.

The deal comes ahead of a trip by Turkish President Recep Tayyip Erdogan to Abu Dhabi in February as part of Turkey’s move to restore ties and focus on the economy.

Mustafa Sentop, speaker of Turkey’s Grand National Assembly, told the Emirates News Agency that the visit “will be a testimony to the improving ties between our countries”.

“We believe that the leaders of Turkey and the United Arab Emirates, side by side, will single-handedly deliver an important message. The goal is to further strengthen bilateral relations. There are mutual efforts to reach new agreements and renew previous commitments to cover a wider range in our current cooperation,” he added.

According to the Emirates News Agency, the UAE is Turkey’s largest trading partner among the Gulf Cooperation Council countries, with trade between the two countries worth $8 billion in 2020.

Sentop said trade in the first 10 months of 2021 amounted to $6.4 billion.lira

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