September 7, 2018 / 11:49 AM / 3 months ago

As lira tumbles, Turkey requires exporters to convert revenue to lira

ISTANBUL (Reuters) - Turkey has required exporters to convert the bulk of their overseas revenue into lira, a surprise move designed to support the tumbling currency, but one that industry officials say could lead to losses for manufacturers.

FILE PHOTO: A 20 lira banknote is seen through a magnifying lens in this illustration picture taken in Istanbul January 28, 2014. REUTERS/Murad Sezer/File Photo

The lira has fallen more than 40 percent against the dollar this year, driving up the cost of food and fuel and sending inflation soaring to 18 percent, its highest in a decade and a half.

Economists say Turkey needs big interest rate increases to put a floor under the lira and rein in inflation. The central bank has been reluctant to hike, given pressure from President Tayyip Erdogan, a self-described “enemy of interest rates”.

Under a decree announced this week, exporters must convert 80 percent of their foreign exchange revenue into lira within 180 days of receiving payment. The measure went into effect from Tuesday and will last six months. Turkey’s exports totalled $157 billion last year, according to official data.

The requirement could cause losses for exporters who source raw materials abroad or have foreign currency loans, said Seref Fayat, who heads the clothing committee at Turkey’s main industry group TOBB. Firms will be forced to convert income despite outstanding foreign exchange liabilities, he said.

“There will be a problem when your due date comes for a loan or you would need to buy raw material with foreign currencies,” Fayat said. “This decision needs to be amended.”

The regulation should be changed so that foreign exchange liabilities are taken into account when determining how much exporters are required to convert, he said.

Finance Minister Berat Albayrak met Turkish exporters on Thursday to discuss the regulation and said industry demands would be met with certain amendments, the state-run Anadolu news agency said.

As it stands, the regulation could cost exporters $3-4 billion, including currency conversion costs, said one official in the machinery sector, declining to be identified.

Non-financial firms had a net foreign exchange deficit of $215.9 billion in June, according to central bank data, liabilities that need to be offset with foreign exchange.

BIG EXPORTER

Exporters were not consulted by the government ahead of time and only found out about the regulation when it was announced in the government’s Official Gazette this week, several people in the export sector told Reuters.

Turkey, which has a customs union with the European Union, exported $15 billion to Germany last year, its top destination, according to IMF data. Other major markets were Britain, the United Arab Emirates, Iraq and the United States.

Although a big exporter of textiles, clothing, steel and cars, Turkey is reliant on overseas raw materials for manufacturing, and imports cotton, scrap metal and chemicals.

Anywhere from 65 to 90 percent of the revenue in the steel and iron sector is spent on imports of raw materials, said Namik Ekinci, the head of the steel federation, an industry group. He described the regulation as “illogical”.

A senior sales manager at a textile company said the regulation could ultimately undermine the amount that companies export.

“We buy raw materials with this money. Now we are forced to convert it into Turkish lira – but then when we are buying the raw materials next month in dollars, we will be effectively losing money,” the sales manager said, declining to be identified.

“By doing this every month, you will have less capital to buy raw materials which will inevitably lead to fewer exports.”

Additional reporting by Can Sezer and Humeyra Pamuk; Writing by Ezgi Erkoyun; Editing by David Dolan and Janet Lawrence

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