Turkey backs away from foreign currency protected savings accounts

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Turkey has taken the first steps towards unwinding a $125bn scheme that protects savers against falls in the lira, the latest sign that President Recep Tayyip Erdoğan is backing away from the unconventional economic policies that damaged the country’s economy. 

In a series of announcements on Sunday, the government and central bank said they would begin discouraging savers and businesses from stashing funds in foreign currency protected savings accounts. 

It marks the latest move by the new team appointed by Erdoğan after his re-election in May to dismantle the unorthodox economic programme initiated five years ago that stoked a prolonged and painful inflation crisis and prompted foreign investors to flee Turkey’s markets.

New central bank governor Hafize Gaye Erkan has already more than doubled interest rates since her appointment in June, while the government has raised taxes and sought to reduce imports as part of a plan to restore “rational” economic policymaking. 

Foreign exchange protected savings accounts, which were launched in late 2021, were one of the pillars of Erdoğan’s previous economic policy. The accounts helped slow a rush among local savers and businesses into foreign currencies by compensating holders at the government’s expense when the lira fell against the dollar and euro. 

Turkish banks now hold $125bn in the protected deposit accounts, amounting to about a quarter of total deposits, according to data from Turkey’s Banking Regulation and Supervision Agency. Economists and investors have long viewed these accounts as a big risk since they create a tight link between the country’s government finances and the lira. 

The accounts have cost the government and central bank TL550bn ($20bn) this year alone as the lira has tumbled 31 per cent against the US dollar, according to an estimate by Hakan Kara, a former central bank chief economist. 

The central bank said on Sunday it would end a rule that punished banks if they did not convert a sufficient amount of foreign currency deposits into forex protected accounts. At the same time, the amount of reserves banks must hold against short-term foreign currency deposits will be increased, according to an announcement in Turkey’s official gazette. 

Policymakers hope these rule changes will cause the use of protected forex accounts to decline, while at the same time, encouraging depositors to shift into lira accounts, according to the central bank. “The objective is to contribute to strengthening macro financial stability,” the central bank added. 

Kara said he expected that unwinding the use of forex protected savings accounts would be a “gradual process”. He added that it would depend in part on the interest rates savers can earn on lira-based deposits, which are currently running well below the rate of inflation.