BDL in $3 billion swap
to boost net foreign reserves

Buys back T-bills at large discount

The Central Bank (BDL) killed two birds with one stone in a swap operation with local banks worth $3 billion. BDL needed to strengthen its foreign currency reserves which have, according to the International Monetary Fund (IMF), dropped into negative territory, a result created by the nebulous and intertwined imbalances between deposits by banks and liquidity made available by BDL.

BDL bought back treasury bills denominated in lira from the banks at a premium discount against their subscription to financial instruments denominated in dollars and their commitment to place foreign currency deposits at BDL. The financial instruments the banks subscribed to consist of BDL’s portfolio of Eurobonds and its certificates of deposits.

As a result, interest rates on the lira are falling, and those on the dollar are likely to increase, as banks need to replace the dollars they lent to BDL.

Each bank was allotted a different share of the swap. The aggregate estimated profit by all banks is expected to exceed $900 million, when all discounting has been accounted for. The gains will not show in the banks’ financial statements, as they will be set aside as provisions. These provisions will be released when the application of IFRS9 rules, due in in 2018, (see our story on IFRS9) will force banks to meet a higher capital adequacy ratio (CAR). The release of these provisions then, will allow the banks to use them as equity.

BDL’s gross foreign currency reserves currently stand at $37.3 billion. There are no available figures for net foreign reserves since the bank does not disclose them.

These gross reserves represent 70 percent of the country’s money supply in lira which is double the average in similarly rated economies, said Marwan Barakat, Head of Research Bank Audi. These reserves also account for 24 months of imports compared to a global average of eight months. This shows that BDL is in full control of the domestic foreign exchange market, he said.

Prior to this swap, BDL subscribed to Eurobonds denominated in dollars worth $2 billion issued by the Ministry of Finance against treasury bills denominated in lira.

BDL's actions are in line with its monetary policy to maintain interest rates at current levels and support the exchange value of the lira, a banker said. BDL’s interventions aim to stimulate the economy and support productive sectors, especially knowledge-based companies, the source said. They also aim to create the required flexibility to alleviate debt servicing costs, he said.