Turkey Alters Key Lira Savings Program in Latest Tightening

(Bloomberg) — Turkey is making it costlier for banks to offer short-term deposits that make up the bulk of a $124 billion government-backed lira savings program, a tightening of policy that will soak up billions in liquidity and attempts to discourage people from shifting into dollars.

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Lenders now need to set aside more money as reserves for accounts of up to six months, which protect lira deposits from depreciation against hard currencies, according to a new central bank regulation published in the Official Gazette at midnight.

In another change to the program, known by its Turkish acronym KKM, the central bank is lowering the reserve requirement ratio for deposits maturing in over half a year. The new rules are in effect as of Sept. 1.

Istanbul-based economist Haluk Burumcekci estimates KKM deposits maturing in up to six months make up almost 80% of the total. The hike in reserve requirements will absorb about 200 billion liras ($7.4 billion) in liquidity, he said.

Read more: Lira Lifeline Became $124 Billion Problem That Haunts Turkey

The emergency backstop used by Turkey to stave off a currency crisis has emerged as a major drain on state finances and now accounts for slightly more than a quarter of all deposits. As part of a shift toward more conventional policies since President Recep Tayyip Erdogan was reelected in May, officials started to take steps last month that push banks to discourage clients from renewing their KKM deposits.

But authorities run the risk of savers increasingly opting to move their money into dollar accounts, with the program seeing weeks of outflows for the first time since early this year. Higher KKM reserve requirements will likely force banks to offer more generous deposit rates on regular lira deposits.

The impact of the earlier measures has meanwhile become more evident, with total KKM deposits declining for the third consecutive week. Net outflows amounted to 15.7 billion liras in the seven days ending Sept. 8, bringing total withdrawals during the period to 75.3 billion liras.

Under the mechanism, lira depositors can hedge against currency losses by getting state-guaranteed compensation for any depreciation that exceeds the interest on the accounts. It was introduced in late 2021.

Erdogan said last week that KKM had helped stabilize the lira. Moving forward, the focus is on encouraging more people to shift into regular lira deposits, he said.

(Updates with flow data in seventh paragraph.)

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