Turkey Tweaks New Deposit Tool Meant to Ease Lira’s Decline

(Bloomberg) -- Turkey tweaked the price-fixing method used to measure the returns on lira-protected deposits, less than two weeks after President Recep Tayyip Erdogan announced the new instrument as part of efforts to shore up the weakening currency.

Under new guidelines issued by the central bank, the so-called conversion rate will be set using foreign-exchange buying rates announced six times a day instead of once a day. The rate is used to measure the lira's level against major currencies at the opening date of new accounts.

A similar change also applies to deposits whose returns are linked to the price of gold, another instrument that aims to encourage citizens to convert to liras from gold-based deposits. The end-of-maturity rate will be based on the buying rate at 11 a.m. local time.

Erdogan urged citizens to convert foreign currencies to liras on Friday, also calling on those keeping gold at home to put their savings in the banking system. “Interest is the reason and inflation is the result,” he said in Istanbul, adding that those who think the opposite is true are acting with “the capitalist logic of the West.” Islamic teachings provide a “weapon” against those who attack Turkey through exchange rates, he said.

The president unveiled an emergency plan on Dec. 20 to curb the lira's unprecedented depreciation and protect investors against swings in the currency. One measure guarantees that returns on lira-denominated deposits wouldn't fall short of bank interest rates, in an effort to end current spot demand for foreign exchange.

How Erdogan's Plan to Halt the Lira's Fall Is Meant to Work

The lira recovered some of its losses in December after Erdogan introduced the mechanism. However, the currency remains about 31% weaker than it was on Sept. 23, when the central bank started cutting interest rates. It remains the worst performer among emerging-market currencies against the dollar this year, with a slump of around 43%.

“If parts of the system are continuously amended, people may opt to wait for a more advantageous change,” said Ozlem Derici Sengul, founding partner of Istanbul-based Spinn Consulting. “We're going through a serious lira liquidity crunch and the only way to boost the lira base is this mechanism. Unless it works quickly, loan rates will not decline.”

Speaking in a TV interview on Dec. 29, Treasury and Finance Minister Nureddin Nebati said the amount citizens deposited under the new system reached 59.8 billion liras (about $4.5 billion).

The lira weakened 0.8% to 13.2598 per dollar at 2:35 p.m. on Friday, its fifth straight decline. The currency depreciated about 44% in 2021, the worst performer among emerging-market currencies tracked by Bloomberg.