Responding to an exchange rate crisis and spiralling inflation, Turkey’s government has implemented a series of measures during the past month to persuade savers, banks and companies to hold more lira rather than foreign currency. Some analysts have described the laws and regulations as soft capital controls.
The Turkish authorities have also introduced a scheme to induce foreign currency holders to convert their funds to lira. The new deposit accounts offer substantially higher interest rates and a guarantee, backed by the central bank and Treasury, against potential exchange rate losses. Having spent billions of dollars supporting the lira in the currency market, the central bank is desperately seeking to rebuild net foreign reserves, which have dropped more than 60% from mid-December to just USD 7.5bn.
The actions taken have steadied the lira, which has recovered from a precipitous dive to 18.4 per dollar in December to hold in a relatively tight range around 13.5 per dollar this month.
Here are some of the main measures employed:
EXCHANGE RATE PROTECTED DEPOSIT SCHEME
There are two ways by which individuals or companies can avail the scheme, known by its acronym KKM. They can either transfer lira into bank accounts, for which they would be paid an interest rate three percentage points above the central bank’s policy rate, currently set at 14%. Or they can convert foreign currency holdings into lira and place it in the deposit scheme, for which banks have offered yields of as high as 26%, though there is no maximum rate. Funds have to be deposited for a at least three months. Introduced on Dec. 20, the KKM scheme has drawn more than TRY 200bn (USD 14.7bn). But little of that was converted from hard currencies as Ankara intended.
INDUCEMENTS TO BANKS
To make banks more ready to offer the lira deposit scheme to customers, the central bank pays banks a higher remuneration rate for lira reserves converted from foreign currencies, while exempting those funds from calculations for required reserves. Banks that fail to convert at least 10% of all customers’ dollar and euro deposits to lira by April 15 face a penalty of 1.5% on those deposits. General managers at state banks have called clients to encourage them to convert part of their FX savings into the deposit scheme, and bank employees have been given related performance targets.
CORPORATE TAX EXEMPTIONS
Earlier this month, the government widened the KKM scheme to enable corporates to participate. Last week, parliament approved a corporate income tax exemption on gains companies book by converting hard currency holdings into lira. Finance Minister Nureddin Nebati said he expects some USD 10bn of forex bank deposits to be converted to TRY due to the new law.
TAPPING EXPORTERS’ REVENUES
To help rebuild reserves, Turkish exporters have been instructed to sell 25% of their hard currency revenues to the central bank. To help exporters and importers manage their exchange rate risk, the central bank has begun auctions for lira-settled FX forward sales.
TAPPING CITIZENSHIP-FOR-HOMES PROGRAMME
Turkey has been offering citizenship to foreigners who buy real estate worth at least USD 250,000 or those who make a fixed capital investment of at least USD 500,000. Under a new regulation, the foreign currency investments under the programme are sold to the central bank through another Turkish bank.
FX SWAPS, DEPOSITS FROM ABROAD
To tee up much-needed foreign funds, the central bank arranged a nearly USD 5bn FX swap with its counterpart in the United Arab Emirates. Reportedly, Turkey has also persuaded Azerbaijan’s central bank to open a EUR 1bn deposit account in the country.
ACCOUNTING CHANGE FREES FUNDS FOR TREASURY
Central bank accounts show that on the last day of 2021, its valuation account was adjusted by about TRY 124bn (USD 9.4bn). Analysts said this allowed it to record a profit for 2021 despite the currency crisis, and to make an advance payment in February to the Treasury, its main shareholder, providing potential funds to guarantee the KKM. (USD/TRY = 13.6163)