The compensations — or “covert” interest — that Ankara pays to depositors under a scheme to curb dollarization in Turkey are on course to balloon beyond its interest payments, while the battered Turkish lira has already fallen back close to its record low in December, when the scheme was introduced.

The so-called FX-protected deposits were launched as part of emergency measures that President Recep Tayyip Erdogan announced shortly after the lira sank to an all-time low of 18.4 against the dollar on Dec. 20, driven down by unorthodox rate cuts by the central bank at Erdogan’s behest. Under the scheme, the treasury and the central bank make up for any losses that lira depositors incur from the currency’s depreciation. Despite its initial rebound to the region of 11 versus the dollar after the announcement of the scheme, the lira has since plummeted anew, trading at about 18.1 against the greenback on Aug. 22.

As a result, the cost of the scheme to the state has been swelling.

Retail and corporate depositors held more than 1.2 trillion liras ($66.2 billion) in FX-protected accounts as of early August. The deposits have notably grown in the past several months as the government expanded the scope of the scheme and facilitated the terms for corporates.

The banks have been responsible for paying depositors an annual interest of 17%, or some 4% for the minimum term of three months. The extra yields — or the gains the depositors would have made in terms of liras had they kept their money in dollars — have been met from the central government budget and the central bank.


Written by Mustafa Sönmez