Turkey Ends Foreign Exchange-Protected Deposit Program
Turkey has made another policy u-turn by ending its foreign exchange (FX)-protected deposit program. Treasury and Finance Minister Mehmet Simsek has announced that the program, also known as KKM, will be phased out by 2024. This decision follows President Recep Tayyip Erdoğan’s re-election and the appointment of Simsek as the Finance Ministry head. The move towards orthodoxy was reinforced by the central bank’s decision to raise interest rates. Previously, the government had resisted devaluing the lira or increasing interest rates and instead implemented measures such as the KKM program to protect the currency. However, Simsek’s recent announcement signals a permanent shift in policy.
In a tweet, Simsek outlined the expected benefits of ending the program, including a decrease in inflation, an increase in reserve adequacy, improvement in the current account, and establishment of fiscal discipline by 2024. This decision comes after Simsek previously suggested that the withdrawal from the KKM program could be achieved without incentives. As of January 1, banks in Turkey are expected to stop offering FX-protected lira deposit accounts.
Hot Take: Turkey’s Economic Policy Shift
The decision to end Turkey’s foreign exchange-protected deposit program is a clear indication of the country’s shift towards orthodox economic policy. By phasing out the program, Turkey aims to address various economic challenges such as inflation, reserve adequacy, and the current account deficit. This move highlights the government’s commitment to implementing fiscal discipline and stabilizing the lira. The decision follows President Erdoğan’s re-election and the appointment of Mehmet Simsek as the Finance Ministry head, signaling a significant change in economic priorities. As Turkey embraces a more conventional approach, it remains to be seen how these policy shifts will impact the country’s economic trajectory.
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