Turkey Ends Currency-Protected Savings Program

Introduction

The Turkish Central Bank’s recent announcement on the termination of the FX-protected deposit scheme (KKM) marks one of the most critical shifts in Turkey’s monetary policy landscape since 2021. With the scheme scheduled to end by the close of 2025, regulators have already revised rules on reserve requirement remuneration and commission practices tied to the program.

At its peak, the KKM scheme covered deposits worth $140 billion, but this figure has now dwindled to $11 billion. The drawdown reflects both structural weaknesses in the policy and broader market dynamics. This article provides a comprehensive cause–effect analysis, highlighting why the scheme was introduced, why it is being phased out, and what implications await individuals, businesses, and the Turkish economy.

Background of the KKM Scheme

• Policy Rationale (2021)
  In late 2021, when the Turkish lira lost 44% of its value against the dollar, the KKM scheme was introduced to stabilize currency markets. The idea was to shield savers from FX volatility while keeping deposits in lira.

• Structure of the Scheme
  Individuals and corporates could place lira deposits into special accounts with a state-backed guarantee against depreciation losses. Any gap between lira interest rates and FX depreciation was covered by the Treasury and the Central Bank.

• Performance Timeline

  • 2021: Lira fell 44%, scheme rapidly gained traction.

  • 2022: Lira lost 29%, Treasury costs escalated.

  • 2023: Lira lost 37%, KKM coverage peaked.

  • 2024: Depreciation slowed to 16%, scheme balances declined.

Causes of Termination

1. Mounting Fiscal Costs

   • Covering FX depreciation created a budgetary burden.

   • Treasury outflows to compensate depositors strained public finances.

2. Distortion of Monetary Policy

   • Artificially sustained lira deposits limited interest rate effectiveness.

   • Monetary transmission mechanisms weakened, undermining inflation targeting.

3. Market Confidence Issues

   • Heavy reliance on KKM signaled policy fragility.

   • Investors perceived the scheme as a short-term fix rather than a structural solution.

4. Shrinking Participation

   • Deposits shrank from $140B → $11B, showing reduced demand.

   • Higher domestic interest rates and alternative instruments made KKM unattractive.

Consequences of Termination

1. For Households and Businesses

• Shift to Traditional Deposits: As remuneration rates increase, lira deposits may become attractive on their own.

• Exposure to FX Risk: Savers will once again carry the full exchange-rate burden.

• Corporate Balance Sheets: Firms that relied on KKM as a hedging tool must adopt alternative risk-management strategies.

2. For the Central Bank

• Policy Flexibility: Ending KKM allows cleaner interest rate management.

• Reduced Fiscal Burden: Treasury no longer absorbs FX losses.

• Credibility Gain: Phasing out ad hoc policies signals a return to orthodoxy.

3. For the Turkish Economy

• Short-Term Volatility: A possible increase in dollarization as savers migrate back to FX.

• Medium-Term Stability: Enhanced credibility may attract portfolio inflows.

• Inflation Dynamics: Reduced monetary distortion supports anti-inflation strategy.

Regulatory Adjustments

Following the termination, the Central Bank announced revisions to:

• Reserve Requirement Remuneration: More market-oriented remuneration encourages banks to rely on traditional deposits.

• Commission Practices: Abolishing special commission incentives tied to KKM realigns banking practices with conventional risk–return metrics.

These adjustments are part of a structural normalization agenda aimed at anchoring expectations.

Strategic Implications

For Policymakers

• Gradual Exit is Key: Phasing out KKM too abruptly risks capital flight.

• Communication Strategy: Consistent signaling is essential to avoid destabilizing expectations.

For Banks

• Product Innovation: New hedging instruments (derivatives, FX-linked bonds) may replace KKM.

• Liquidity Management: Banks will need to rebalance reserve strategies without KKM support.

For Investors

• Renewed Confidence: Policy normalization may improve Turkey’s investment climate.

• FX Hedging Costs: Investors must account for higher volatility premiums in the post-KKM environment.

Conclusion

The end of the KKM scheme is not just a technical adjustment but a structural shift in Turkey’s economic governance. Initially launched to contain a currency crisis, it succeeded in slowing dollarization but at the cost of fiscal discipline and policy credibility.

Its termination—backed by regulatory revisions—marks a pivot towards orthodox monetary policy, signaling to domestic and international stakeholders that Turkey aims to normalize its economic framework. While short-term volatility is inevitable, the medium-term outlook may strengthen if reforms are pursued consistently.

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