Turkey's former Treasury undersecretary: "Terrible picture created by below-inflation interest rates"

Turkey's former Treasury undersecretary Mahfi Egilmez said on Friday that the policy of setting policy interest rate below inflation levels has "created a terrible picture" and that this policy imposed an annual financial burden of tens of billions of dollars on the Treasury and the Central Bank while depriving the state of substantial tax income.

Egilmez said that the holders of currency rate protected deposit accounts will be paid over 600 billion lira (over $22 billion) by the Treasury and the Central Bank till the end of 2023 according to estimates, adding that no official figure is available as the Central Bank does not disclose any concerning these payments.

The scheme was introduced late 2021 to stop the flight from Turkish lira amid a currency crisis and to slow down lira's depreciation against dollar and euro. Holders of FX protected accounts are paid an interest rate on top of compensation for the lira's loss against reserve currencies, and the funds for the compensation is provided by the Treasury and the Central Bank.

Egilmez said in his article:

"To summarize, the terrible picture we have created by setting policy interest rate below inflation levels is as follows: (1) The payments for currency rate protected accounts, which have partially replaced the interest to be paid by banks, has been taken over by the Treasury and the Central Banks, and funds for such payments are provided both by printing money and through taxes paid by the people. (2) Those who are responsible for the situation here are not the depositors. These people and companies have decided to take that path, which was offered, and even imposed, by the government, simply to avoid loss in the face of inflation. (3) If the interest rates had not been pulled under inflation levels, the banks would now be paying similar amounts to their clients as interest and the state would would collect tax from these revenues. It is now deprived of this tax income, because in the case of currency rate protected accounts, payments of interest and compensation of losses against foreign currencies are tax exempt. (4) The Central Bank would make a profit if it had not been assigned the obligation to fund the payments for currency rate protected accounts and would turn over its profit to the Treasury. It instead suffers a loss because of the current system and is forced to print money to cover losses."