Turkey Urges Banks to Enhance Lira-Defense Initiative

Turkey's central bank is urging commercial lenders to make the terms of an emergency savings scheme more attractive after Turks started withdrawing money from the program, according to people familiar with the situation.

The Turkish government introduced a savings plan in late 2021, in the midst of a currency crisis, that promises a state-guaranteed return on lira deposits that matches or beats any decline against the dollar. This became a key tool for the government to stabilize the lira after it lost almost 30% of its value in the space of a month.

There is concern that the program's recent outflows will increase demand for hard currency, putting further downward pressure on the lira.

Officials from the central bank met with lenders’ representatives this week to discuss their concerns about exits from the savings tool, according to people familiar with the matter. The regulator also asked banks to offer better returns to customers who convert foreign currency holdings into lira in order to participate in the savings program.

When contacted by Bloomberg, a representative for the central bank declined to comment on the meeting.

The Turkish central bank's decision to ban the use of derivatives and options that eventually allow lira deposits to create new demands for foreign currency has led to a new regulation from the central bank last month. This regulation prohibits lenders from using these instruments to create new demands for foreign currency.

The FX protected deposit scheme allows savers to open accounts with liras or foreign currency. If the lira depreciates by more than the interest rate on the account, the Turkish Treasury or central bank is responsible for paying the difference. The program has cost the Treasury nearly $5 billion, according to Treasury and Finance Minister Nureddin Nebati.

Even with 1.46 trillion liras ($77.7 billion) held in the savings program as of Dec. 23, the Turkish currency was among the worst performers in emerging markets last year. It extended its slide to a record low on Thursday, sinking as much as 0.2% to 18.7868 versus the greenback. The Turkish currency has been struggling against the US dollar, and it hit a new low on Thursday.