Türkiye seeks to scrap lira protection schemes, sparks banking sector concerns

Turkish lira reached a new record low
Türkiye seeks to scrap lira protection schemes, sparks banking sector concerns
Türkiye aims to stabilize the lira amid global challenges (Photo Credit: Reuters)

The Turkish authorities are making efforts to stabilize the exchange rate of the lira against the dollar. They aim to compensate for the substantial losses incurred due to fiscal and monetary policies, as well as the impact of geopolitical developments worldwide.

The Central Bank of Türkiye (TCMB) of has introduced a new policy to gradually eliminate a lira protection scheme. However, this move has faced opposition from private banks, and as a result, the currency experienced another significant decline, reaching a new record low on Tuesday (stands at 27.22 at the time of writing).

Read more: Moody’s raises outlook for Türkiye’s banking sector to stable 

In December 2021, Türkiye introduced a measure called “foreign exchange-protected accounts,” referred to as KKM. This response was prompted by a significant decline in the value of the lira. These accounts provided lira depositors with a guarantee from the state. They ensured compensation for any depreciation in the lira that exceeded the interest earned.

New policy

According to Bloomberg, TCMB announced on Sunday that private banks have the responsibility to gradually persuade depositors to convert their savings from KKM to regular lira accounts. However, several private banks express concerns about their ability to meet the government’s conversion targets. They anticipate the need to take on additional government debt as a consequence. On Monday, the banks held a teleconference with Central Bank officials to express their discontent.

According to the pro-government Turkish news outlet Hurriyet, the aim of the new policy is to boost the amount of regular lira deposits. As of August 11, the value of deposits in KKM was reported to be 3.36 trillion lira ($124 billion).

The announcement had a negative impact on markets in Türkiye. According to Reuters, the lira experienced a significant decline, reaching a new record low of 27.1675 lira against the dollar on Monday.

Additionally, Türkiye’s main banking index, the BIST Banks Index, fell by 5.4 percent early on Monday, as reported by the outlet.

Türkiye inflation


In July, the most recent inflation data reveals a 9.49 percent increase, marking the highest monthly rate in a year. This rise can be attributed to a combination of tax increases and a significant decline in the value of the lira.

As per the Turkish Statistical Institute, consumer price inflation reached an annual rate of 47.83 percent. This increase followed eight months of decline, with inflation at 38.21 percent in June. The relative stability of the lira was among the contributing factors, particularly until Erdogan’s re-election.

In July, Türkiye implemented an approval for a two-percentage-point increase in VAT across two categories. Additionally, the tax on personal bank loans was raised.

In recent weeks, TCMB made an update to its inflation forecast. The new forecast indicates a rise to 58 percent by the year’s end, compared to the previous report’s figure of 22.3 percent. This adjustment is one of the measures being taken to regain credibility with the markets.

Furthermor, the Central Bank of Türkiye has revised its inflation forecast, projecting a higher rate by the end of 2024. The new forecast indicates an increase to 33 percent from the previous estimate of 8.8 percent. Furthermore, it anticipates a 15 percent inflation rate by the end of 2025.

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