What's Happening?
The Turkish central bank has announced the termination of its foreign exchange (FX)-protected deposit scheme, effective August 23. This scheme, which was introduced in late 2021, allowed individuals and businesses to deposit Turkish lira in special accounts that were safeguarded against exchange rate losses. The decision to end the scheme is part of a broader move to abandon unorthodox economic policies that have been linked to a significant depreciation of the lira. The currency has seen substantial losses against the dollar over the past few years, with a 44% drop in 2021, 29% in 2022, 37% in 2023, and 16% last year. The value of deposits under this scheme has decreased from a peak of $140 billion to just $11 billion. The central bank has also revised its regulations on reserve requirement remuneration and commission practices related to the scheme.
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Why It's Important?
The termination of the FX-protected deposit scheme marks a significant shift in Turkey's economic policy, moving away from measures that have been criticized for exacerbating the country's currency crisis. The scheme was initially designed to stabilize the lira by encouraging deposits in the local currency, but it has been costly, with estimates suggesting it has cost the government $60 billion. The end of this scheme could signal a return to more conventional economic policies, which may help restore investor confidence and stabilize the Turkish economy. However, the immediate impact on the lira and the broader economy remains uncertain, as the country continues to grapple with high inflation and economic instability.
What's Next?
Following the termination of the FX-protected deposit scheme, the Turkish central bank is expected to focus on implementing more traditional monetary policies to address the ongoing economic challenges. This may include adjusting interest rates and other measures to control inflation and stabilize the currency. The government's ability to effectively manage this transition will be crucial in determining the future trajectory of the Turkish economy. Additionally, the response from international investors and financial markets will be closely watched, as their confidence in Turkey's economic policies will play a key role in the country's economic recovery.
