Turkey unveils foreign currency scheme to prop up lira

Turkey has unveiled a new scheme to push exporters to hold less foreign currency as the government of Recep Tayyip Erdoğan steps up its battle to defend the lira ahead of this year’s elections.

The country said on Thursday it would offer companies new incentives to swap money they earn abroad into lira in return for a vow not to purchase foreign currencies.

The new programme is the latest sign of how Turkey is deploying a broad range of tools to prop up the lira and boost its $800bn economy ahead of presidential and parliamentary elections set for May 14. It comes as polling shows that disquiet over the government’s handling of the economy has eroded support for Erdoğan and his ruling Justice and Development party (AKP).

A coalition of opposition political parties, known as the “table of six”, is expected to name a candidate in the coming weeks to challenge Erdoğan, who has been in power for two decades.

Under the programme announced on Thursday, Turkey would provide 2 per cent “conversion support” when companies exchanged international earnings to lira with the central bank, and they pledged not to buy foreign currencies over a set period, according to the central bank. It did not specify the length of the commitment that would be required.

Exporters were already required to convert 40 per cent of their foreign currency income to lira under rules announced last year. But the new programme provides an incentive for companies to eschew the stability of holding dollars in favour of lira. Companies converting additional funds into local currency can also use a special account to protect against swings in the lira.

Liam Peach, an economist at Capital Economics in London, said it was “not clear whether this will have a significant impact as the incentives may not be large enough for firms to convert their remaining foreign currency earnings into lira”, but that it may represent a “first step towards tighter restrictions that force conversion of firms’ foreign currency”.

“If we’ve learned anything in Turkey over the past year, it’s that the central bank will eventually plug any hole in the financial system to reduce foreign currency demand,” he added.

The central bank is seeking to lift the proportion of lira deposits in the banking system to 60 per cent in the first half of this year; it reached 55 per cent at the end of 2022 from 36 per cent in January.

The lira fell almost 30 per cent to a record low in 2022 as the nominally independent central bank, which is effectively controlled by Erdoğan, slashed interest rates even as inflation reached a peak of 85.5 per cent in October. Many economists say the lira is still overvalued and would fall further if not for government support measures, such as the special currency-protected savings accounts that are open to businesses and consumers, which have helped to stabilise it in recent months.

Turkey also spent $85.5bn last year intervening in the currency market in an attempt to slow the lira’s fall, according to Goldman Sachs estimates that take into account foreign currency purchased from exporters and then re-sold into the market.

The central bank said in a report on Thursday it expected inflation to fall to 22.3 per cent per cent by the end of the year, after it eased to 64.3 per cent in December. However, many private economists worry price growth will accelerate again after elections as the government spending splurge fuels a short-lasting but powerful jolt of economic activity.