Türkiye is looking to ensure an exit from a government-backed scheme safeguarding Turkish lira deposits against foreign exchange depreciation without causing instability in the markets, a senior official said late Monday.
The government began rolling back the so-called KKM scheme and announced measures after the May elections to dissuade companies and individuals from renewing the KKM accounts, which reached a record of over TL 3.4 trillion ($116 billion) in mid-August.
The total has dropped by about TL 700 billion to TL 2.68 trillion as of Dec. 15, Vice President Cevdet Yılmaz said.
The scheme, unveiled in late 2021, sought to keep dollarization at bay by encouraging people to keep their savings in lira through guarantees to compensate for losses from decline against hard currencies.
Yılmaz said the program "fulfilled its duty during its tenure, and now we are continuing the exit process gradually and healthily from this mechanism without causing instability in our financial markets."
"This gradual exit process will continue throughout the year 2024," he told the lawmakers at Parliament.
Yılmaz also stressed that the central bank's gross reserves reached around $142.5 billion as of Dec. 15.
The figure marks a $44 billion increase from $98.5 billion prior to the May vote, which Yılmaz credited for dispelling political uncertainties, emphasizing the consolidation of political trust and stability.
Since the elections, the country's central bank has embraced more conventional policymaking. It delivered aggressive monetary tightening aimed at arresting soaring inflation, reducing trade deficits, rebuilding foreign exchange reserves, and stabilizing the Turkish lira.
The bank has lifted its one-week repo rate by 3,400 basis points since June. Last week, it suggested it was closer to the finish line by saying it expects to "complete the tightening cycle as soon as possible."
Drop in lira volatility, inflation
Yılmaz also addressed the diminishing volatility in the lira exchange rate, noting that it is operating below the average volatility of developing countries. The lira is down more than 35% against the U.S. dollar so far this year.
Yılmaz linked the reduced volatility to the positive effects of the government's policies, emphasizing the significant decrease in the country's credit default swaps (CDS), which fell from around 700 basis points in May to 285 basis points. A narrow CDS indicates an anticipated lower risk of sovereign default.
"In the last six months, international capital inflow has accelerated, our reserves have strengthened, exchange rate volatility has decreased, and financing conditions have improved," he noted.
"While the balancing in the economy supports the Turkish lira, growing interest in lira assets, an increase in reserves and the stable trend of the exchange rate also contribute to the fight against inflation."
Yılmaz acknowledged a downward trend in consumer prices over the recent months.
"We observe a momentum loss in inflation since August. Despite adverse seasonal conditions and unforeseen geopolitical risks, the trend of declining inflation persists," he noted.
"Inflation has evolved toward a path consistent with our 2024 targets, and the decline in inflation is evident. On an annual basis, a significant decrease is expected in the second half of 2024."
The central bank expects inflation to rise from nearly 62% last month to 70%-75% in May before dipping to about 36% by the end of next year as tightening cools prices.
Yılmaz also said the budget deficit is expected to be lower than initially projected, potentially reaching levels around 5.5% of gross domestic product (GDP) instead of the anticipated 6.4%. He attributed this to the political stability achieved after the elections and the effectiveness of implemented policies.
He said the government aims to lower financing costs to support investment and exports, fostering an inflationary-adjusted growth path.
"Our goal is to manage the disinflationary process simultaneously with export and investment-oriented, production and employment-generating growth," he confirmed.