CBRT unveils new liraization strategy to prop the Turkish lira

The Central Bank of the Republic of Turkey (CBRT) announced more measures to boost the plunging Turkish lira. Companies will now be required to increase their Turkish lira holdings to access financing from the country’s banks.

In a statement, the CBRT decided to strengthen the existing capital rules to encourage more lira savings. The bank also deterred the country’s banks from holding more foreign currency. This means that if a bank does not have 60% of its deposits in lira, it will need to push its currencies at the central bank. In other words, the CBRT increased the reserve requirement ratio to 30%.

In another rule, the CBRT said that commercial banks in the country will need to buy 7% of additional local currency-denominated government bonds if their deposits dip below the 60% threshold level. 

These measures solidify the bank’s so-called liraization strategy that seeks to encourage the use of Turkish lira in the economy. In January, the government called its exports to hold less foreign currency. Instead, the government will provide incentives for them to swap the funds they earn abroad.

Another part of the liraization strategy is that the bank is now reimbursing savers their inflation-adjusted losses. Most importantly, the government is spending billions to support the currency. It spent $85.5 billion supporting the economy.

Analysts believe that the Turkish lira crisis can be averted if the central bank decides to embrace a conventional approach to monetary policy. Unlike other central banks, the CBRT has slashed interest rates from 20% to 8.5% even as inflation remains above 50%.

The Turkish lira has been one of the worst-performing currencies in the world. As I wrote here, the USD/TRY has jumped by 90% from its lowest level in December 2021. The pair was trading at 19.25 on Friday, a few points below its all-time high of 19.31.