The cost of KKM to the economy has been revealed! The figure is staggering...

Implemented in the final days of 2021 to curb the surge in the dollar, the Currency-Protected Deposit (KKM) system was designed to protect Turkish Lira deposit holders against fluctuations in exchange rates. KKM, which peaked in 2022 by reaching a size of 140 billion dollars, has entered a gradual exit process over the last year.

According to a report by Ekonomim, at the point it has reached today, the system's volume has shrunk to 11.8 billion dollars, while its share of total deposits has fallen from 26.2% to the 2% level.

SHARP LOSS OF THE LIRA

During the four-year period that KKM has been in effect, the Turkish Lira has experienced consecutive, significant losses in value against the dollar:

2021: 44%

2022: 29%

2023: 37%

2024: 16%

These sharp declines caused the exchange rate difference payments undertaken by the Treasury to reach massive proportions.

CRITICISMS FROM ECONOMISTS

Despite strong objections from economic circles, KKM remained in practice for a long time. Some of the assessments made at the time were as follows:

Dr. Mahfi Eğilmez: “KKM did not reduce the demand for foreign currency; it only postponed it. It created a massive burden on public finance and was put in place of structural reforms. This prevented the building of lasting trust.”

Prof. Dr. Emre Alkin: “This was a stopgap policy. It curbed the exchange rate in the short term, but weakened the Treasury and the Central Bank in the medium-to-long term. If the 60 billion dollar cost had been transferred to other investments, much more added value could have been created.”

Prof. Dr. Hakan Kara: “KKM led to the neutralization of monetary policy. It reduced the power of interest rate decisions over the market and increased the risk premium instead of lowering it.”

Esen Çağlar: “The biggest problem with the system was that it created an unfair income distribution. Large deposit holders benefited disproportionately from the exchange rate difference payments.”

Uğur Gürses: “KKM was a TL product indexed to foreign currency. While it was expected to strengthen the TL, it actually reinforced expectations that could accelerate the exit from the TL.”

POLICY SHIFT AND THE PATH TO EXIT

Following the May 2023 elections, AKP Chairman and President Recep Tayyip Erdoğan abandoned the low-interest-high-inflation policy and turned toward more traditional monetary policies. Policy interest rates were increased rapidly. With inflation falling from 75% to 33.5% (TUIK data), a process of interest rate cuts has begun.

Treasury and Finance Minister Mehmet Şimşek stated in his remarks the other day, “Thanks to our exit strategy and tight monetary policy, the KKM balance is decreasing steadily.” Assessments from the banking sector suggest that the system could end completely earlier than the targeted date.

IT HAS LOST ITS FORMER APPEAL

The capping of KKM returns at 40% of the policy rate has caused the system to cease being a real alternative to TL deposits for a long time. New KKM account openings and renewals for companies were completely stopped at the beginning of this year.

THE BEGINNING OF KKM AND ITS COST TO THE ECONOMY

The Currency-Protected Deposit system was announced to the public on December 20, 2021, by the then-Minister of Treasury and Finance, Nureddin Nebati. Nebati had said, “Our citizens will protect their Turkish Lira deposits with peace of mind. There will be a state guarantee against exchange rate volatility.” The goal was to reduce the demand for foreign currency and reinforce trust in the TL.

At the point reached today, according to calculations made by Reuters based on CBRT reports and budget data, the cost of the system to Turkey has reached 60 billion dollars.

LATEST STATUS IN KKM ACCOUNTS

Last week, the total balance in KKM accounts decreased by 11.6 billion liras to 477 billion 586 million liras. Thus, KKM's share of total deposits fell to the 2.04% level.