Mahfi Eğilmez: KKM disaster
Mahfi Eğilmez
In September 2021, when both inflation and policy rates were at 19 percent and inflation was signaling an increase, the Central Bank began lowering interest rates, and the irrational process that was heading towards disaster quickly became clear as a result of the rising exchange rates. However, because politicians refused to back down from their rhetoric about the cause and effect of inflation, the Central Bank was unable to reverse this mistake and raise interest rates. On the contrary, it continued to lower them. However, the rise in exchange rates persisted. This time, the currency-protected deposit account (CCD) was invented and implemented as an antidote. Openers of these accounts would deposit their money, either in Turkish Lira or foreign currency, into the CDA for a specific maturity and interest rate. At maturity, the foreign exchange buying rate announced by the Central Bank was compared with the exchange buying rate at the time of account opening. If the exchange difference at maturity was higher than the account's interest yield, the exchange 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 exchange rate fluctuations. For a while, the Treasury (budget) and the Central Bank jointly covered the KKM accounts, then the entire burden was transferred to the Central Bank.
The Central Bank announced today that it has terminated the opening and renewal of KKM accounts. This brings to an end a practice that lasted approximately three years and eight months and has become a symbol of irrationality in the economy, resulting in a loss of approximately $60 billion.
This loss has impacted society in many ways. The Central Bank, which made a profit of 72 billion TL in 2022, lost 818.2 billion TL in 2023 and 700.4 billion TL in 2024. The loss is estimated to continue, albeit at a decreasing rate, in 2025. While the Central Bank's (CKM) is undoubtedly not the sole cause of the loss, it is the most significant. It's possible for the Central Bank to incur losses even without the CKM. This is a common occurrence, especially in an environment of increasing global uncertainty. Such losses can arise due to exchange rates and fluctuations in the value of reserves (especially gold). Some of this loss may even arise as a result of monetary policy. However, the loss in our case was largely due to the CKM implementation.
What happens if the Central Bank makes a profit or a loss? If the Central Bank makes a profit, it transfers a significant portion of its profits to its main shareholder, the Treasury, in accordance with the provisions of its founding law. This money entering the budget thus contributes positively to the financing of the budget deficit. Conversely, if the Central Bank makes a loss, such a transfer will not occur, and the budget deficit financing problem will be exacerbated. This is what has happened in the last three years.
My father always told me, "If something is going wrong in your life, first look at yourself. If you're convinced you're not, then look at others." When faced with rising inflation and the flight to foreign currency, driven by the rhetoric of interest rates as cause and effect, the economic administration realized the flaw was in this practice. I'd like to add another point to my father's words: "If the fault lies with others, there's limited scope for action. But if the fault lies with you, the first thing to do to resolve this mistake is to undo the steps that led to it." Unfortunately, instead of undoing the missteps that led to the error, the economic administration took an even more wrong path, introducing the KKM practice and costing the country $60 billion in losses.
Now that the KKM has been removed, we might think there will be no more losses, but unfortunately, the truth is this isn't the case. This time, the carry trade route has been opened to remove the KKM. For some time, carry trades have been turned a blind eye to prevent the exchange rate from skyrocketing. This has also resulted in significant losses. If this is added, the total loss would exceed $60 billion.
I don't know if we have eradicated the stubbornness to make similar mistakes after the KKM was abolished three years and eight months after its implementation.
T24
