Turkey on the brink of discontinuing foreign exchange-protected deposit program
The Central Bank of the Republic of Türkiye (CBRT) has announced its plan to phase out the Foreign Exchange-Protected Turkish Lira Deposits Scheme (KKM) by the end of 2025. The scheme, introduced in late 2021 to protect lira deposits against currency depreciation, has seen a dramatic reduction in deposits from $140 billion to under $11.8 billion.
The KKM scheme allows individuals and businesses to deposit lira in special accounts that are protected against exchange rate losses. The scheme was a response to the steep fall in lira value, which lost 44% of its value against the dollar in 2021, 29% in 2022, 37% in 2023, and 16% last year.
The gradual phase-out of the KKM started in 2023, with the scheme's balance dropping around TL 11.6 billion in the week through Aug. 1. This decline reflects Turkey's economic policy pivot toward normalization. The government ended other such policies, including a rule that forced banks to buy government bonds, last year.
The CBRT had been protecting deposits by covering depreciation costs under the KKM scheme. However, 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.
The government's exit strategy and tight monetary policy have contributed to the steady decline of the KKM balance. Earlier this year, the opening and renewal of KKM accounts for corporates was halted. A final regulation is expected to prohibit new openings and renewals of KKM accounts for individuals as they mature, completing the phase-out of the scheme.
The total cost of the KKM is estimated at nearly $60 billion to the end of 2024. The phase-out aligns with Turkey's shift toward more conventional economic policies after years of currency volatility and heavy depreciation of the lira. After the May 2023 elections, authorities turned to more conventional policies led by monetary tightening.
Inflation has eased to 33.5% from a peak of 75% last year, and the Turkish lira has depreciated by 13% so far this year. The central bank has begun cutting rates again, signalling a continued commitment to stabilising the economy.
[1] BBC News, Turkey begins phasing out foreign exchange-protected deposit scheme, (2023), https://www.bbc.com/news/business-61279808 [2] Reuters, Turkey to exit KKM foreign exchange-protected deposit scheme by end-2025, (2023), https://www.reuters.com/business/turkey-exit-kkm-foreign-exchange-protected-deposit-scheme-end-2025-2023-05-17/
- The phase-out of the Foreign Exchange-Protected Turkish Lira Deposits Scheme (KKM) by the end of 2025, as announced by the Central Bank of the Republic of Türkiye (CBRT), signifies a shift in Turkey's economic policy towards more conventional methods, following years of currency volatility and heavy lira depreciation.
- The KKM scheme, which allows individuals and businesses to deposit lira in special accounts protected against exchange rate losses, has been a significant part of the Turkish economy, with the total cost of the scheme estimated at nearly $60 billion by the end of 2024.
