By Nevzat Devranoglu
ANKARA (Reuters) -Turkey is on the verge of ending a scheme protecting deposits from currency depreciation that is estimated to have cost $60 billion, another step to abandon unorthodox economic policies that triggered a lira crisis several years ago.
Turkish officials said the KKM scheme, introduced in late 2021, will be terminated by the end of 2025, though many bankers believe the exit could come even sooner.
The value of deposits covered by the scheme has shrunk from a peak of $140 billion to just $11.8 billion, a figure now seen as negligible in the context of Turkey’s $1.3 trillion economy. The exit from KKM has progressed much faster than initial market expectations.
Under the scheme, individuals and businesses were able to deposit lira in special accounts that were protected against exchange rate losses. The lira lost 44% of its value against the dollar in 2021, 29% in 2022, 37% in 2023, and 16% last year.
Finance Minister Mehmet Simsek told Reuters this week the KKM balance had declined steadily thanks to the government’s exit strategy and tight monetary policy. The KKM stock has fallen to 478 billion lira ($11.8 billion) from 3.4 trillion lira in August 2023. Its share of total deposits slid to 2% from 26.2%.
Until May 2023 elections, the central bank implemented an unorthodox policy, backed by President Tayyip Erdogan, of low interest rates despite high inflation.
After securing a new term, Erdogan backed a U-turn towards more orthodox policy, which brought higher interest rates to curb soaring inflation. With inflation having eased to 33.5% from a peak of 75% last year, the bank has begun cutting rates again.
According to Reuters calculations based on central bank reports and budget data, the total cost to the Turkish state of the KKM is estimated at nearly $60 billion to the end of 2024 – making it one of the most expensive regulatory measures in Turkey’s recent economic history.
Last year Turkey ended other such policies, including a rule that forced banks to buy government bonds, effectively ending state control over the bond market. Earlier this year, the opening and renewal of KKM accounts for corporates was halted.
Since the return on KKM accounts is capped at 40% of the policy rate, they have long ceased to offer a meaningful alternative to regular lira deposits.
As the remaining KKM accounts held by individuals mature, a final regulation is expected to prohibit new openings and renewals, completing the phase-out of the scheme.
Meanwhile, the lira has continued to weaken but at a slower pace. This year it has depreciated by 13%.
($1 = 40.6772 liras)
(Reporting by Nevzat Devranoglu; Editing by Daren Butler and Toby Chopra)
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