Another collapse of the Turkish lira ahead of Turkey’s May 14 national elections is one currency ‘freak show’ President Recep Tayyip Erdogan does not want to see. His officials are thus working overtime, raiding a toolbox for special measures designed to ensure it does not happen.
On January 26, Turkey presented a new scheme to push exporters to hold less FX. Companies will be offered fresh incentives to swap into lira money they’ve earned abroad. In taking advantage of the programme, they must pledge that they will not purchase foreign currencies over a set period (a period that has not as yet been defined).
Under the scheme, Turkey will provide 2% “conversion support” when a company exchanges international earnings for the beleaguered lira with the central bank.
Regulation previously introduced has already made it obligatory for Turkey’s exporters to convert 40% of their FX income to lira. Officials are after as much of the remaining 60% that they can get their hands on. They want to persuade companies that there are no longer enough reasons to cling to the anticipated stability of dollars rather than switch to lira. Moreover, companies that do convert additional funds are invited to use a special state-sponsored account that offers protection against swings in the value of the lira.
Liam Peach, an economist at Capital Economics, observed that “the incentives may not be large enough for firms to convert their remaining foreign currency earnings into lira”. However, he cautioned, the scheme may represent a “first step towards tighter restrictions that force conversion of firms’ foreign currency”.
“If we’ve learned anything in Turkey over the past year, it’s that the central bank will eventually plug any hole in the financial system to reduce foreign currency demand,” he added.
After losses against the dollar of 44% in 2021, the lira depreciated another 30% to a record low in 2022 as, following the president’s assertive unorthodox ‘Erdoganomics’, the central bank continued to cut interest rates despite rampant inflation that on official reckonings hit a peak of 85.5% last October.
Turkey spent $85.5bn last year intervening in the currency market in an effort at putting a brake on the descent of the lira, Goldman Sachs estimates show.