2023-08-22 18:57:39
The Turkish government no longer wants to protect its compatriots against exchange rate losses, as it had promised in a campaign launched at the end of 2021 to exchange dollars, euros, gold and precious metals for lira. Apparently, the costs of the program, which was intended to stabilize the lira exchange rate, are so high for the state budget that the government now wants to end it in the long term. Analysts see this as a further step towards a return to an “orthodox” financial and monetary policy that is taken for granted in market economies but has long been opposed by President Recep Tayyip Erdoğan. The KKM program was part of his strategy to “reliraize” Turkey.
Andreas Mihm
Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.
The costs shared with the National Bank burdened the national budget with 3.4 billion dollars in 2022 alone. The budget is already strained by the effects of inflation, many election gifts and the cost of rebuilding entire cities after the devastating February earthquake.
The government cannot simply cancel the program
However, given the sheer size of the deposit program, which the banking regulatory and supervisory authority says has swelled to $124 billion – that’s 28 percent of all savings in Turkey – the government cannot simply cancel the program overnight, which could also cause turmoil in the foreign exchange market . Instead, it uses the banks. According to a new official specification, they should not encourage their customers to make further investments in the foreign exchange program, but discourage them.
If the targets set are not met, the banks are forced to buy poorly yielding government bonds. In parallel, the central bank also raised banks’ reserve ratios on foreign exchange deposits, creating additional pressure to shift customer money into lira accounts. Bankers protested the provision, bank stocks came under pressure on the Istanbul Stock Exchange.
“Obviously, the economic administration wants an exit from the KKM, but they can’t, so they are implementing these macroprudential measures,” Inanç Sozer, managing partner of Istanbul-based consulting firm Virtus Glocal, told Bloomberg news agency. The central bank said it aims to “contribute to strengthening macro-financial stability by supporting Turkish lira time deposits”. She is arguably banking on banks raising interest rates on lira deposits, which would support the new monetary policy strategy.
Rate hikes below market expectations
The new central bank governor, Hafize Gaye Erkan, has raised interest rates twice since then, reversing the course of financial and monetary policy pursued up until the elections at the end of May. With the increase from 8.5 to 17.5 percent, however, it fell short of market expectations. Analysts are expecting a further increase to 20 percent on Thursday – which still seems little in view of inflation rising again from the last 47.8 percent after tax increases. The central bank expects consumer prices to rise by 58 percent for the year.
The interest rate hikes are also intended to stabilize the lira exchange rate, which has lost around 30 percent against the dollar in 2022 and this year, despite the deposit program – and the change in strategy in economic policy announced at the beginning of June.
Friederike Böge, Ankara Published/Updated: , Recommendations: 11 Friederike Böge, Vakıflı/Antakya Published/Updated: , Recommendations: 3 Andreas Mihm, Vienna Published/Updated: , Recommendations: 12
However, market skepticism remains high. At almost 27.24 lira per dollar, a new record was reached on Tuesday. In the current “Damokles” indicator calculated by the investment bank Nomura, Turkey is right at the top with the risk of an acute currency crisis.
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