In a significant move indicating a shift in economic strategy, Turkey has embarked on the initial stages of dismantling a $125 billion program designed to shield savers from the impact of lira depreciation. This change marks the latest departure from the unconventional economic policies that had negatively affected the nation’s financial health, attributed to President Recep Tayyip Erdoğan’s administration. 

Over the weekend, both the government and central bank jointly announced their intent to discourage individuals and businesses from holding funds in foreign currency-protected savings accounts. This announcement is part of a broader strategy undertaken by the newly-appointed team following Erdoğan’s re-election in May. This team has been actively working to unwind the unorthodox economic approach implemented five years ago, which was responsible for a prolonged period of inflation and a loss of foreign investor confidence in Turkey’s markets.

Under the leadership of the newly appointed central bank governor, Hafize Gaye Erkan, interest rates have been significantly raised since June. The government has also implemented tax increases and has taken steps to reduce imports as part of a comprehensive effort to steer the nation’s economic policies back to a more rational course.

Foreign exchange-protected savings accounts, initially introduced in late 2021, were a key pillar of Erdoğan’s prior economic strategy. These accounts aimed to slow the rush of domestic savers and businesses towards foreign currencies by providing compensation to account holders at the expense of the government when the lira depreciated against the US dollar and the euro.

Current data from Turkey’s Banking Regulation and Supervision Agency indicates that Turkish banks presently hold approximately $125 billion in these protected deposit accounts, constituting around a quarter of total deposits. Economists and investors have long expressed concerns about the risks associated with these accounts, given their close linkage between the government’s financial position and the stability of the lira.

Estimations suggest that the government and central bank have incurred costs of TL550 billion (equivalent to $20 billion) in the current year alone due to the lira’s significant 31% decline against the US dollar. Hakan Kara, a former chief economist of the central bank, arrived at this estimate.

To address these concerns, the central bank announced its decision to end a rule that penalized banks for not converting an adequate portion of foreign currency deposits into forex-protected accounts. Simultaneously, the central bank plans to increase the reserve requirements for short-term foreign currency deposits, as stated in an official notification published in Turkey’s official gazette.

The objective of these policy modifications is twofold: firstly, to decrease the utilization of protected forex accounts, and secondly, to encourage depositors to transition to lira-denominated accounts. The central bank highlighted that the goal is to enhance macro-financial stability. It’s anticipated that the process of unwinding the use of forex-protected savings accounts will be gradual, contingent on factors including the interest rates offered for lira-based deposits, which are currently trailing well behind the inflation rate.

The central bank has established a goal for banks to decrease their portion of deposits linked to foreign exchange rates. Under a new regulation detailed in an official announcement on Sunday, financial institutions whose customers do not transition a specific proportion of their foreign exchange-linked deposits into standard lira deposits will be required to procure additional government bonds. Deposits held within these foreign exchange-linked accounts are ensured a yield that corresponds to the rate of the lira’s depreciation, or a predetermined standard interest rate if the currency’s value remains stable.

Photo Source: Google

20th August 2023

Delino Gayweh 

Serrari Financial Analyst