Drain on Turkey’s reserves raises prospect of gold sales to prop up currency

Wed Mar 25 2026

A sharp drop in Turkey’s foreign reserves since the Iran war began is calling into question its exchange rate policy and whether the central bank will have to tap into its gold holdings to prop up the currency, fund managers and economists said. Rapid outflows of foreign money over the past three weeks have prompted Turkey’s central bank to spend about $30bn to keep the lira stable — almost as much as during the financial panic that followed the arrest of Istanbul mayor Ekrem İmamoğlu last year. “The central bank’s current foreign exchange policy can’t last much longer at this pace of reserves loss — unless they sell some of their gold reserves,” said Kieran Curtis, emerging markets fund manager at Aberdeen. Nato member Turkey, which shares a 550km border with Iran and is trying to mediate an end to the war, is particularly exposed to the conflict as it imports most of its energy needs. Finance minister Mehmet Şimşek said last week that it was “impossible” for Turkey to “remain unaffected” by the war and that he was most worried about the current account deficit — a vulnerability that can weigh on the lira. In the three weeks to March 19, the central bank sold $26bn of foreign currency, which took net reserves excluding swaps down to $43.4bn, according to calculations based on official data by Bürümcekçi Research and Consulting. Other independent economists estimate that net reserves have fallen by $34bn since the conflict began.

However, the bank also has more than $100bn of gold, of which about $30bn is held at the Bank of England, according to JPMorgan, and this gold could be used to intervene in currency markets “without logistical constraints”. To bolster its foreign reserves, the bank was considering using gold swaps, Bloomberg reported on Tuesday. Gold swaps typically involve the temporary exchange of gold for foreign currency, with an agreement to reverse the transaction later.

The central bank did not immediately respond to a request for comment. Turkey has rebuilt its economic credentials over the past three years under the stewardship of Simsek, a former investment banker, and central bank governor Fatih Karahan, a former US Federal Reserve economist.

Their ultra-high interest rate and strong exchange rate policies helped bring inflation down to about 30 per cent in January from a peak of 85 per cent in late 2022, and rebuild depleted foreign reserves — in part thanks to foreign investors attracted by Turkey’s high interest rates, currently at 37 per cent. But higher energy costs rippling through the Turkish economy risk undercutting the tight monetary policy used to bear down on inflation, stabilise the lira and maintain the confidence of foreign investors and Turkish savers.

Since the war began on February 28, Brent has risen by more than $30 a barrel, hovering at around $102 on Tuesday. Inflation ticked up to 31.5 per cent last month, one of the highest rates in the world. Turkey’s annualised current account deficit, meanwhile, rose to almost $33bn.

“Turkey has held out well and performed better than many expected,” said Timothy Ash, senior sovereign strategist at RBC Bluebay Asset Management.

“However, the longer the war goes on and if energy prices remain high, almost everyone agrees what would have to happen: Turkey would have to let the lira go and raise interest rates. In that scenario, though, the whole world would be suffering,” Ash said.

So far, the central bank has refrained from raising its main policy rate — unlike last March, when to quell the financial turmoil that followed the arrest of İmamoğlu, President Recep Tayyip Erdoğan’s biggest political rival, it jacked up rates by 3.5 percentage points to 46 per cent and spent as much as $50bn to support the currency. Net reserves fell to as little as $10bn.

Turkey has since rebuilt its reserves buffer. Even so, a further weakening of the economy, and a possible wave of Iranian migrants comparable to the almost 4mn refugees that came to Turkey as a result of the Syrian civil war, would complicate Erdoğan’s political chances in the next presidential election, which has to take place before May 2028. Polls show that his governing Justice and Development Party slightly lags behind the biggest opposition party, İmamoğlu’s Republican People’s Party.

Source: https://www.ft.com/