Record inflows lift Türkiye’s FX-protected lira scheme to $120B

Türkiye’s government-backed scheme that seeks to encourage the conversion of foreign currency by safeguarding Turkish lira deposits from depreciation saw a record inflow in the week prior to last Sunday’s elections, according to data from the country’s banking watchdog.

The scheme, unveiled in late 2021 and known by its acronym KKM, seeks to keep dollarization at bay by encouraging people to keep their savings in lira through guarantees to compensate for losses from the decline against hard currencies.

The volume of deposits under the scheme reached about TL 2.35 trillion (nearly $120 billion) in the week to May 12, marking a new record, according to the Banking Regulation and Supervision Agency’s (BDDK) weekly data.

It marked the 18th consecutive weekly increase. The overall volume is up from $88.8 billion recorded at the end of March.

Households have seen foreign exchange as a tool to shield themselves from a volatility in lira and a soaring inflation.

The data showed that the overall amount rose by a whopping TL 144 billion in the week ending May 12, marking the highest weekly increase ever. In the month and a half prior to presidential and parliamentary elections, the scheme saw an inflow of $31.1 billion, the data showed.

Last Sunday’s vote saw President Recep Tayyip Erdoğan’s People’s Alliance secure a majority in Parliament. The presidential race is headed for a May 28 runoff that will see Erdoğan again face opposition rival Kemal Kılıçdaroğlu.

The first run saw Erdoğan secure just under the 50% threshold needed to win outright and giving him the lead over Kılıçdaroğlu, the chair of the main opposition Republican People’s Party (CHP) and joint candidate of the six-party opposition Nation Alliance.

The lira declined 44% in 2021 and lost some 29% versus the U.S. dollar in 2022. The currency fell some 1% this week after held mostly stable this year.

Meanwhile, the increases in KKM followed a regulation that removed the scheme’s maximum interest rate limit for domestic individual investors.

The regulation still stipulates that the interest rate offered to lira deposits as part of the scheme cannot be below the current policy rate of the Central Bank of the Republic of Türkiye (CBRT), currently standing at 8.5%, but the upper limit has been removed.

Foreign exchange deposits held by households have dropped by $3.4 billion to $185 billion, according to CBRT data.

The KKM now accounts for an important part of the foreign exchange and lira deposits amounting to some $531.8 billion.

Bankers predict that KKM inflows will continue and approach $10 billion every week and that the interest at current interest rates will continue to remain high.

An easing trend last year saw the Central Bank of the Republic of Türkiye (CBRT) cut its key one-week repo rate by 500 basis points to counter an economic slowdown before it held it at 9% in December and January. It justified the cuts by saying financial conditions must remain supportive of maintaining the growth in industrial production.

The bank further cut the benchmark policy rate by 50 basis points to 8.5% after the catastrophic Feb. 6 earthquakes to support the recovery of the real sector. It left the one-week repo rate unchanged in March and April.

The government says the rate cuts boosted exports and investments as part of a program that encouraged lira holdings.

Erdoğan has repeatedly said his government would not reverse the course of its economic policies and would keep favoring lower interest rates if they win the election.

The government has favored lower borrowing costs to boost exports, production and investment and create new jobs. It eventually aims to lower inflation by flipping the country’s chronic current account deficit to a surplus.

The inflation eased to an annual 43.68% in April, almost halving from 85.51% in October, a trend the government suggests would continue in the coming period.

Erdoğan has insisted that high borrowing costs cause high inflation, rejecting economic thinking that suggests raising interest rates helps curb price increases.

Meanwhile, the CBRT’s net international reserves dropped some $4.45 billion to a 21-year low of $2.33 billion in the week to May 12, according to official data.

The bank’s total gross reserves fell $9 billion in the same week to $105.13 billion, the lowest since July 2022.