Desperate against galloping inflation but bent on keeping interest rates low, Turkey’s government has turned to interventionist measures akin to capital controls to bolster the embattled lira. The latest is designed to force companies to reduce hard-currency holdings.

In a surprise announcement late on June 24 after local markets had closed, the Banking Regulation and Supervision Agency banned banks from issuing lira loans to companies holding foreign exchange worth more than 15 million liras ($895,000) if that amount exceeds 10% of their total assets or annual sale revenues.

In an economy where few enterprises operate without using lira loans as operational capital or for export-oriented production, the move is effectively forcing companies to sell hard-currency holdings and lira-ize, which amounts to restricting capital movements and contravenes the free foreign-exchange regime.

The measure is the latest in a series of controversial efforts by the Turkish authorities to prop up the lira and thus rein in inflation without raising interest rates — an unorthodox approach imposed by President Recep Tayyip Erdogan, who argues that high borrowing rates fuel inflation in defiance of conventional economic theory. Turkey’s annual consumer inflation shot up to 73.5% in May from 19.6% in September, when the Central Bank announced the first of four consecutive rate cuts under pressure from Erdogan. The rate cuts pushed real yields deep into negative territory, sending the lira into a tailspin.

Despite the inflation surge, domestic demand has kept production wheels turning and Turkey’s manufacturers, who rely heavily on imported inputs, have continued to buy vigorously from abroad. The country’s imports were worth $146 billion in the first five months of the year, an average bill of nearly $30 billion per month. Companies also need to hold hard currency to repay foreign loans. The real sector owns $61 billion of Turkey’s $182 billion external debt that matures over the next 12 months. And because of a succession of currency shocks in the past several years, companies have come to convert their assets to hard currencies as a precaution.



Written by Mustafa Sönmez