Turkey is moving to pull the plug on the costly foreign exchange-protected savings accounts that the Erdogan administration introduced nearly two years ago.

The accounts, known as KKM, are increasingly burdening the country’s public finances because the toll taken on local savers by the depreciation of the Turkish lira is compensated at the government’s expense. Designed to deter savers from rushing into safe haven hard currencies, they have cost the government and central bank around Turkish lira (TRY) 550bn ($20bn) this year alone as the lira has shed 31% against the US dollar during 2023 to date, according to an estimate by Hakan Kara, a former central bank chief economist. 

The KKM accounts run by the banks now hold $125bn, around a quarter of total deposits, according to data from Turkey’s Banking Regulation and Supervision Agency. The post-election economic team appointed by President Recep Tayyip Erdogan to address Turkey’s heavy economic crisis clearly sees them as one foundation of Erdogan’s unconventional economic construction that needs taking away. 

Government and central bank representatives said on August 20 that they would start discouraging savers and businesses from placing funds in the FX-protected savings accounts. The central bank added that it would scrap a rule that punishes banks that do not manage to convert a sufficient amount of FX deposits into KKM accounts. At the same time, an Official Gazette announcement stated that the sum of reserves banks must hold against short-term FX deposits has been raised. For FX accounts with up to one-month maturities, the reserve ratio was raised to 29% from 25%. Those up to a year have a 25% ratio.

Officials hope the changes will prompt a decline in the use of protected forex accounts and, simultaneously, a shift by depositors into lira accounts. One difficulty with that expectation is that the interest paid to Turkish savers on lira deposits trails inflation by a long shot despite the central bank hiking its key rate by 900 bp since June.

Kara, who is at Bilkent University, was quoted by Reuters as saying that the central bank seeks to "kill two birds with one stone" by pushing up deposit rates while curbing KKM accounts. "Official interest rates could have been raised without engaging in these complex affairs," he remarked.

As of July 21, overall dollarisation stood at 68% in Turkey.