Turkey Plans to End FX-protected Deposit Program in 2024

Turkey plans to end its foreign currency protected deposit program in the new year, according to Turkish Treasury and Finance Minister Mehmet Şimşek.

Şimşek said in a tweet on the social media platform “X”: “2024 will be the year in which annual inflation begins to decline, the adequacy of reserves increases, the foreign exchange protection system ends, permanent improvement in the current account begins, and financial discipline is consolidated.” “The new year will see the foundation for high and sustainable growth strengthened,” he added.

The massive program, also known as KKM, was launched in December 2021 with the aim of bucking the trend of dollarization of deposits and strengthening the Turkish currency.

The program is designed to encourage more savings in Turkish lira, rather than foreign currencies, by ensuring returns on lira deposits that offset any exchange rate losses.

The KKM program was one of the tools used to try to prop up the Turkish lira when it came under pressure from interest rate cuts in a high inflation environment, an ultra-loose monetary policy that was among President Recep Tayyip Erdogan's unorthodox economic ideas.

Following his re-election last May, Erdogan changed his economic team, appointing former Wall Street bankers, namely Şimşek, as Minister of Finance, and Hafize Gaye Erkan, Governor of the Central Bank, in an attempt to attract foreign investors to Turkey.

Officials began the policy normalization process by scrapping some old regulations and raising Turkey's key interest rate by a total of 3,400 basis points to 42.5%.

A gradual reduction in foreign currency hedged accounts was one of the goals of the new team. Bloomberg reported last July that Turkey would look to end the program because it would create pressure on the lira and central bank reserves if large numbers of savers chose to withdraw from it and switch to the dollar again.

Last November, Şimşek told Bloomberg that an exit from KKM could be achieved without the need for any stimulus, given the normalization of monetary policy.

“The biggest incentive for these accounts is tax relief,” he said, adding: “We will evaluate this situation next year. Therefore, the process of exiting KKM is continuing successfully.”

Turkish banks will not offer foreign currency-protected lira deposit accounts for savings held in regular lira accounts as of January 1, state-owned Anadolu Agency reported on Friday. Banks will continue to offer foreign currency protected accounts for deposits in foreign currencies.

Total deposits in foreign currency-protected accounts in Turkey fell by 30.4 billion lira ($1.03 billion) to 2.65 trillion lira in the week ending December 22, according to data from banking regulators.