Turkey's Central Bank Intervenes with $5 Billion FX Sale to Stabilize Lira Amid Political Turmoil: Can the Strategy Hold?

The Turkish Central Bank’s $5 billion foreign exchange (FX) intervention in September 2025 to prop up the lira amid political chaos is a bold but precarious move. According to a Bloomberg report, the sale followed a court ruling that invalidated key appointments by the opposition Republican People’s Party (CHP), triggering a sell-off in lira assets and sending the currency to a record low of 41.16 per dollar [1]. While the intervention temporarily stemmed the lira’s freefall, the broader question remains: Can Turkey’s currency stabilization strategy endure in the face of deepening political and economic fragility?

Political Turmoil as a Currency Killer

The lira’s collapse is not merely a function of monetary policy but a symptom of systemic political instability. The arrest of Istanbul Mayor Ekrem İmamoğlu in March 2025—a move widely perceived as politically motivated—sparked protests and eroded investor confidence [5]. By July 2025, the Central Bank of the Republic of Turkey (CBRT) had raised its policy rate to 46% to combat inflation and stabilize the currency [4]. Yet, as AInvest highlights, the ruling AKP government’s continued crackdown on opposition figures and civil society has left Turkey’s political stability index at -1.01 (on a scale where -2.5 is the worst), far below the global average of -0.06 [2]. This environment breeds uncertainty, deterring foreign capital and exacerbating capital flight.

Economic Fragility Under the Surface

While the CBRT’s FX reserves have rebounded to $171.9 billion as of July 2025—a level seen before March’s volatility—net reserves excluding swaps have plummeted to $46.7 billion [4]. This discrepancy underscores a critical vulnerability: Turkey’s reliance on short-term swaps to inflate reserve figures. Meanwhile, public debt levels remain alarming. The first-half 2025 budget deficit reached $24.3 billion, with interest payments consuming 17% of total expenditures [6]. At a 25.3% debt-to-GDP ratio, Turkey’s fiscal health is precarious, and with inflation still at 35.05% as of June 2025, the CBRT’s tightrope walk between inflation control and growth stimulation grows more treacherous [1].

The CBRT’s Calculated Gambit

The CBRT’s recent 300-basis-point rate cut in July 2025, reducing the policy rate to 43%, signals a cautious pivot toward easing [4]. However, this move risks reigniting inflation if political instability persists. The bank’s “meeting-by-meeting” approach, as described by BBVA Research, reflects a data-driven strategy to balance disinflation with economic activity [1]. Yet, as Allianz notes in its Country Risk Report, Turkey’s external vulnerabilities—including a high external debt burden and reliance on short-term financing—remain unresolved [3]. The CBRT’s ability to maintain credibility hinges on its capacity to resist political pressure and stick to its inflation-fighting mandate.

Sustainability: A Question of Institutional Credibility

For Turkey’s stabilization strategy to endure, the CBRT must navigate two critical challenges:
1. Political Interference: The erosion of democratic institutions and judicial independence under President Erdoğan’s administration threatens the CBRT’s autonomy. Without institutional credibility, market confidence will remain fragile.
2. Fiscal Discipline: Turkey’s fiscal deficit and debt servicing costs—$6.8 billion in June 2025 alone—highlight the need for structural reforms. While Finance Minister Mehmet Şimşek’s efforts to attract foreign investment and improve Turkey’s credit rating to BB– are positive, they cannot offset the risks of political volatility [4].

The Bottom Line for Investors

Turkey’s FX intervention is a short-term salve, not a long-term solution. The CBRT’s tight monetary policy has bought time, but the lira’s stability ultimately depends on resolving the political crisis. As AInvest warns, “The sustainability of Turkey’s economic recovery hinges on balancing political priorities with macroeconomic stability” [1]. For now, the $5 billion injection may stabilize the lira, but investors should brace for turbulence if political repression continues.

Source:
[1] Turkey State Banks Sold $5 Billion to Defend Lira After ... [https://www.bloomberg.com/news/articles/2025-09-03/turkey-state-banks-sold-5-billion-to-defend-lira-after-ruling]
[2] Political Turmoil in Turkey: A Looming Crisis for Emerging Market Investors [https://www.ainvest.com/news/political-turmoil-turkey-looming-crisis-emerging-market-investors-2509/]
[3] Country Risk Report Türkiye [https://www.allianz.com/en/economic_research/country-and-sector-risk/country-risk/turkiye.html]
[4] Türkiye's gross FX reserves return to levels before March volatility [https://www.dailysabah.com/business/economy/turkiyes-gross-fx-reserves-return-to-levels-before-march-volatility]
[5] Political Instability in Turkey: The Arrest of Istanbul’s Mayor and Its Implications [https://atlasinstitute.org/political-instability-in-turkey-the-arrest-of-istanbuls-mayor-and-its-implications/]
[6] Turkey's budget deficit reaches $24.3 billion in first half of ... [https://www.turkishminute.com/2025/07/16/turkeys-budget-deficit-reaches-24-3-billion-in-first-half-of-2025/]