Türkiye is nearing an exit from a scheme shielding deposits against currency depreciation, a measure authorities began phasing out gradually in 2023 following a pivot toward more conventional economic policies.
Officials and the central bank have said the foreign exchange-protected Turkish lira deposits scheme, known as KKM, would be terminated by the end of 2025, though many bankers believe the exit could come even sooner.
Under the scheme, adopted in late 2021 to help reverse dollarization and counter a steep fall in lira, the Central Bank of the Republic of Türkiye (CBRT) had been protecting deposits by covering depreciation costs.
But authorities have been seeking to phase it out gradually and transition deposits into regular lira accounts, in part by dissuading companies and individuals from renewing the KKM accounts.
The value of deposits covered by the scheme has shrunk from a peak of $140 billion to below $11.8 billion, a figure now seen as negligible in the context of Türkiye’s $1.3 trillion economy. The exit from KKM has progressed much faster than initial market expectations.
Under the scheme, individuals and businesses were able to deposit lira in special accounts that were protected against exchange rate losses. The lira lost 44% of its value against the dollar in 2021, 29% in 2022, 37% in 2023, and 16% last year.
So far this year, it has depreciated by 13%.
Treasury and Finance Minister Mehmet Şimşek told Reuters this week the KKM balance had declined steadily thanks to the government's exit strategy and tight monetary policy.
The KKM stock has fallen to almost TL 478 billion ($11.75 billion) from TL 3.4 trillion in August 2023. Its share of total deposits slid to 2% from 26.2%.
The balance dropped around TL 11.6 billion in the week through Aug. 1, according to the data from the Banking Regulation and Supervision Agency (BDDK) on Thursday.
After May 2023 elections, authorities turned to more conventional policies led by monetary tightening primarily aimed at curbing stubborn inflation.
With inflation having eased to 33.5% from a peak of 75% last year, the central bank has begun cutting rates again.
The total cost of the KKM is estimated at nearly $60 billion to the end of 2024, according to Reuters calculations based on central bank reports and budget data.
Last year, Türkiye ended other such policies, including a rule that forced banks to buy government bonds, effectively ending state control over the bond market. Earlier this year, the opening and renewal of KKM accounts for corporates was halted.
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.
As the remaining KKM accounts held by individuals mature, a final regulation is expected to prohibit new openings and renewals, completing the phase-out of the scheme.
