Mahfi Eğilmez wrote: Calculating the cost of currency-protected deposits

Mahfi Eğilmez calculated the cost of the recently expired currency-protected deposit in a post on his personal blog. We are publishing Eğilmez's article with his approval.

Exchange rate-protected deposit accounts (CCDs) were introduced in December to prevent the run on foreign currency that began in September 2021 when the Central Bank (CBRT) began lowering interest rates (which were 19%) despite a rising inflation rate (which was 19%). Those who opened a CBRT account at banks would deposit their funds, either in Turkish Lira or foreign currency, into the CBRT account for a specific maturity and interest rate. Upon maturity, the exchange rate announced by the CBRT was compared with the exchange rate at the time of account opening. If the exchange rate difference at maturity was higher than the account's interest yield, the exchange rate difference was paid; if the interest yield was higher than the exchange rate difference, then interest was paid. Thus, this model protected deposits, whether in Turkish Lira or foreign currency, against fluctuations in exchange rates.

Initially, the exchange rate differences on Turkish Lira deposits were paid by the Treasury from the budget, while the exchange rate differences on foreign currency deposits were paid by the Central Bank of the Republic of Turkey (CBRT). A law enacted in July 2023 stipulated that both obligations would be covered by the CBRT. However, due to past burdens, the budget continued to be burdened. At the end of 2023, the practice of opening KKM accounts in Turkish Lira was abolished. On February 15, 2025, the practice of opening and renewing KKM accounts for legal entities was abolished. As of August 23, 2025, the practice of opening new KKM accounts was completely terminated, and it was decided that maturing accounts would not be renewed.

The annual budget burden of the KKM in 2022 was 92.5 billion TL ($5.6 billion). As of the seventh month (until the process is fully transferred to the Central Bank of the Republic of Turkey), the burden on the 2023 budget reached 59.5 billion TL ($3.1 billion). Accordingly, the KKM incurred a total budgetary cost of $8.7 billion. Because no tax deduction (withholding tax) is applied to interest or premiums earned from the KKM accounts, exchange rate differences or interest payments are made net, resulting in no contribution to the Treasury. Therefore, the $8.7 billion cost is a net cost.

While we can clearly see the budget payments for the CCC accounts in the public accounts, the same clarity is not present in the CBRT accounts. In other words, we cannot clearly see the costs the CBRT incurred as a result of the CBRT's implementation.

On the other hand, the fact that the Central Bank of the Republic of Turkey (CBRT), which made a profit until 2022 and transferred a large portion of this profit to the Treasury (budget), announced a loss of 818.2 billion lira in 2023 and 700.4 billion lira in 2024, and that some of the loss items showed very high increases compared to previous years, leads us to believe that a significant portion of these losses are due to the KKM.

We calculate these items by estimating that they constitute 90 percent of the total loss. In this case, we estimate losses from CCC as (818.2 x 0.90 =) 736.4 billion TL for 2023 and (700.4 x 0.90 =) 630.4 billion TL for 2024. Based on these assumptions, the CCC cost table we prepared looks like this (the data in the table is taken from the central budget detail tables and the CBRT's independent auditor reports. When estimating the portion of the CBRT's losses from CCC, as mentioned above, the assumption was made that 90 percent of the total loss was from CCC):

Note: The reason why the period average USD exchange rate under the budget heading in 2023 is different from the period average USD exchange rate under the CBRT heading is that the budget implementation is valid for the first seven months of 2023.

According to the table, the cost of the three-year implementation of the KKM application is estimated at 58.9 billion dollars.

The table below shows the evolution of the KKM accounts, which were decided not to be renewed and to be liquidated this month, since the beginning (the data in the table is taken from the BRSA weekly data reports):

As can be seen from the table, there was still 440.5 billion lira ($10.9 billion) in the Central Bank of the Republic of Turkey (CBRT) accounts as of August. Liquidation of this surplus will take several more months, depending on the maturity dates. Therefore, CBRT will still incur a cost to the CBRT in 2025, pushing it up by an additional $58.9 billion.

The calculations we've shared so far do not include the tax revenues lost by the Treasury due to the non-taxation of income from the CCC accounts. If interest rates were reduced and the Treasury and the Central Bank of the Republic of Turkey (CBRT) were not required to cover the interest normally paid by banks through the CBRT, banks would have to withhold taxes from the interest they would have paid and pay them to the Treasury. Therefore, the budget would collect revenue rather than incur costs. Furthermore, the interest the CBRT had to pay for the additional borrowing it applied for due to its inability to transfer dividends to the Treasury due to its losses is also not included in this calculation. Because the CBRT's loss due to the implementation of the CBRT also eliminated its ability to pay corporate tax, the resulting revenue loss to the budget is also not included in these calculations. The CBRT's loss was largely financed by reserve requirements, which the CBRT paid interest on. These payments should also be considered when calculating the CBRT's costs.

When we add these, the cost of KKM to the Turkish economy will increase even more.

In an environment of rising inflation, raising interest rates by two percentage points, effectively solving an economic problem that could have been solved without burdening either the Treasury or the Central Bank of the Republic of Turkey (CBRT), at a cost likely reaching around $70 billion, has gone down in history as one of the most serious economic policy blunders. Throughout this period, banks not only made substantial profits by transferring their interest burdens to the Treasury and the CBRT through the CBRT, but also incurred additional costs (such as holding large amounts of low-interest bonds) to ensure their customers remained in the CBRT accounts.

Turkey was forced to raise interest rates to exit the CCC. When the CBRT initiative began, the policy rate was 19 percent, but this rate was subsequently reduced to 8.5 percent. During this period, personal and commercial loans were provided at interest rates far below inflation. These borrowers achieved incredible returns. Starting in mid-2023, the rate had to be raised to 50 percent to exit the CCC. Currently, 43 percent is approximately ten percentage points above the announced inflation rate. As interest rates were raised and the exchange rate suppressed starting in mid-2023, a phenomenon known as a carry trade began to emerge. Türkiye has been trapped in this trap for two years.

Let's illustrate the process of carry trades and how they translate into a cost to the country with an example. Let's assume the USD/TRY exchange rate is 40 TRY, a 15% tax is withheld from interest income, and a bank offers a 40% gross interest rate on a one-year TRY deposit. In such an environment, someone converts $100,000 that has been sitting in a bank without earning interest into Turkish Lira. They deposit the resulting 4,000,000 TRY with a one-year maturity and a 40% gross interest rate, with the exchange rate remaining constant throughout the year. At the end of the one-year maturity, this person will have a gross interest income of 1,600,000 TRY. After withholding tax is deducted, they will have 1,360,000 TRY. Converting 5,136,000 TRY, including the principal, into dollars, reaches $134,000. This translates to an incredible profit, earning 34% interest in a single year. It is not possible to obtain such a dollar interest rate anywhere in the world.

If we hadn't been forced to implement the CCC by lowering interest rates in September 2021, we wouldn't have had to make such interest payments to anyone. We don't know the exact extent of the cost the country faces as a result of the carry trade. Moreover, this is ongoing and will continue for some time. The resulting cost will likely be no less than the CCC cost. Therefore, when calculating the CCC cost, we must also include the cost of the carry trade.

Just as the Ministry of Treasury and Finance calculated and published the payments made to it by the KKM down to the last penny, I believe it is a requirement of transparency policy that the Central Bank of the Republic of Turkey (CBRT) should do the same.

Economic policy is a blend of science and art. If you don't approach these issues with the sensitivity of an artist and the meticulousness of a scientist, you'll end up with these extraordinary costs.