A new policy from Turkey’s central bank that aims to phase out a lira protection scheme has been met with opposition from private banks, and the currency fell to another record low on Tuesday.
What happened: Turkey instituted “foreign exchange-protected accounts” known as KKM in December of 2021 in response to a plunge in the lira’s value. These accounts enabled lira depositors to receive guaranteed compensation from the state for any depreciation of the lira that exceeded the interest.
On Sunday, Turkey’s Central Bank said that private banks must gradually convince depositors to convert their savings from KKM into normal lira accounts. However, a number of private banks feel they will not be able to meet the government’s conversion targets and will need to take on more government debt as a result. On Monday, the banks held a teleconference with Central Bank officials to voice their discontent, Bloomberg reported.
The purpose of the new policy is to increase the volume of normal lira deposits. The value of deposits in KKM was 3.36 trillion lira ($124 billion) as of Aug. 11, the pro-government Turkish news outlet Hurriyet reported.
Markets in Turkey responded negatively to the news. Reuters reported that the currency fell to a new record low of 27.1675 lira to the US dollar on Monday. Turkey’s main banking index, BIST Banks Index, also fell by 5.4% early Monday, according to the outlet.
The lira’s downward trend subsequently continued as it fell to around 27.22 to the dollar on Tuesday, and remained there as of approximately 9:30 a.m. ET on Wednesday. The BIST Banks Index also dropped 2.59% by the end of Tuesday, according to market data.
Why it matters: Turkey’s economy is experiencing a litany of problems, including high inflation. The lira has also lost more than 30% of its value this year. The currency was valued at around 8 to the dollar in September of 2021 before falling to more than 16 to the dollar the following December. The lira has fallen further this summer.
The modification to the KKM is one of several economic changes in Turkey since President Recep Tayyip Erdogan won re-election in May. The Turkish Central Bank raised interest rates in June and July in an effort to tame inflation under new Governor Hafize Gaye Erkan. For years, the bank refused to raise rates under Erdogan’s influence. Erdogan’s belief that lower interest rates lead to lower inflation defies economic orthodoxy.
Turkey also raised taxes on several essential goods in July due to the country’s widening deficit. The tax hikes have created significant pain for Turkish consumers, Nazlan Ertan reported for Al-Monitor last month.
Source : AlMonitor