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Turkey: Details of lira deposit support

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The Ministry of Treasury and Finance has released a statement regarding the “Exchange Rate Protected Lira Time Deposit” instrument, which was introduced to support the Turkish currency:

 

·        The tool is valid for individuals who have a TRY deposit account with a maturity of 3, 6, 9 and 12 months.

·        The minimum interest rate will be the policy rate of the Central bank.

·        Currency difference will be calculated by using the dollar buying rate to be published by the central bank at 11:00 am every day. In case the TRY deposit rate is higher than the maturity date, the exchange difference will be deposited in TRY to the customer’s account.

·        Banks can join the system voluntarily.

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·        No withholding tax will be applied to such accounts.

·        The government is trying to implement the system for Islamic banks.

 

To elaborate; In order to restrain the current spot demand for foreign currency, it is guaranteed that the deposit yields will not fall below the Central bank interest rates and the exchange rate increase rate in the relevant maturity. The Treasury will compensate the difference if the yield of TRY deposits remains below the exchange rate. For example; The yield operating in the TRY deposit account, where a 14% interest is applied from the central bank policy rate, will be applied directly at the rate of 20% if the exchange rate hike is 20% in a 1-year period. The Treasury will pay the difference to the account holder and the interest accrued in practice will be at the rate of the exchange rate movement.

 

We also cared about the maturity separation issue. It is understood that 32 and 45-day maturities will not be subject to this foreign currency difference payment. There will be no interest and exchange rate payments for 3, 6, 9 and 12-month term deposits in case of conversions before the maturity date. In the relevant maturities, the minimum rate will operate as the periodic discounted rate of the Central bank policy rate (for example, the periodic rate of 14% policy rate for 6-month maturity is roughly 7%), and if the exchange rate rises more than the interest rate in that period, the deposit yield will be equal to the increase in the exchange rate (with a 6-month maturity). If the exchange rate increases by 10% while the periodic interest is 7%, the return will be 10%.

 

Since the Treasury will undertake the exchange rate difference, the higher the exchange rate, the more cost will be incurred on the budget. It will be necessary to read its impact on the budget in terms of deficit, borrowing requirement and money supply. Indirect taxes on consumption to finance the budget deficit or the way of increasing the money supply may increase inflation. This causes the concepts of monetary tightening and Menderes escort monetary expansion to be intertwined. Since the application of interest equal to the exchange rate to TRY accounts will index the interest rate to the exchange rate in practice, it has the effect of increasing the interest rate in high exchange rates, and this is a contractionary policy. Increasing the money supply, in terms of being a source of financial underwriting of the Treasury, is monetary expansion.

 

Therefore, for a healthy operation, it seems important that the demand for foreign currency decreases, that there is a change from hard currency type accounts to TRY accounts, and that the exchange rate does not rise excessively in this regard. Stabilizing the lira could help inflation rates. According to the BRSA October data; TL deposits of real persons with maturities higher than 3 months correspond to approximately 7% of the total TRY deposits. According to the weekly situation data of the Central Bank, the ratio of foreign currency deposits to total deposits was 61.7% as of the week of 10 December.

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