Lecture Notes: Turkish Lira and Economic Measures

Introduction

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Turkish Government's Measures

• Extraordinary measures announced to boost the Turkish lira.
• Introduction of a new savings product to protect savings from currency fluctuations.
• Rollout scheduled in a few days; uncertain uptake and impact on public finances.

The Savings Scheme

• Turkish Lira rose over 40% against the dollar post-announcement.
• Recorded the most volatile trading day since the introduction of the new Turkish lira.

How the Scheme Works

• Savings product compensates for losses if the lira falls more than the central bank's interest rate.
• Available to individuals only, not businesses.
• Maturities range from 3 to 12 months, with a minimum interest rate matching the central bank’s benchmark.
• No withholding tax applied on interest.

Interest Rate Structure

• If banks pay 14% for one-year lira deposits, and if the currency depreciates more than that, taxpayers cover the difference to deposit-holders.
• Early withdrawal penalties apply, with no interest paid if withdrawn early.

Objectives of the Scheme

• Aim to incentivize retention of money in lira, preventing exchange for dollars or spending.
• Traditional monetary policy suggests raising interest rates during high inflation to stabilize currency.

Analysis of the Product

• Viewed as a savings account with variable interest rates corresponding to currency value changes.
• Aims to prevent mass selling of the lira; an indirect interest rate increase for savers.
• Functions like a currency peg for specific accounts only.

Current Economic Context

• No capital controls in Turkey; contrasting with countries like China/India.
• Turkey has a negative current account and positive capital account.
• Dollarization: 60% of banking deposits in USD, individuals prefer holding dollars for stability.

Dollarization Details

• Many Turks might borrow in lira, benefiting from currency depreciation.
• Scheme may not regain trust in lira among citizens who prefer foreign currency.

Economic Implications

• Foreign investors are largely disinterested due to high borrowing costs and lack of research on Turkey.
• High inflation expected (>30%); borrowers likely to seek real assets, not lira savings.
• Risk shifts from inflation to credit risk for the government if citizens invest heavily in the scheme.

Risks and Concerns

• The government bears the exchange rate risk, potentially leading to more lira issuance if the currency falls.
• Wealthier individuals can benefit more from the savings product, placing a burden on taxpayers.
• The lira's jump post-announcement partly due to perceived interest rate hike and central bank interventions.

Conclusion

• Turkey's economy is diversified but faces challenges from global economic conditions.
• Low household debt levels are favorable compared to other economies (e.g., Argentina, Lebanon).
• Future developments will depend on global economic trends and local reactions to the new savings product.

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