Analysts warn that with the end of the KKM, short-term volatility and market shocks are inevitable. The lira may experience larger swings in the near term, requiring investors to manage currency risks, but the policy shift could restore credibility over time.

by Xinhua writer Xu Wanhu

ISTANBUL, Sept. 1 (Xinhua) -- Trkiye is ending its foreign exchange (FX)-protected deposit scheme (KKM), a program launched three years ago to prop up the lira, the country's currency, and curb dollarization.

The Central Bank of the Republic of Trkiye has announced that it is terminating the scheme for real persons, a move analysts say points to market-based policies but may bring short-term volatility.

DEPOSITS DECLINE, CONFIDENCE GROWS

In response to a sharp lira drop of 44 percent against the U.S. dollar in late 2021, the government introduced the KKM, allowing individuals and businesses to place lira deposits that were compensated by the state for currency losses.

Analysts say the program helped stabilize short-term capital outflows, but over time it increased fiscal pressures. Persistent lira weakness also underscores doubts about the scheme's long-term sustainability. Economist Mahfi Egilmez commented that the scheme merely delayed FX demand while undermining fiscal discipline.

Turkish Finance Minister Mehmet Simsek noted that the phase-out of the KKM and tight monetary policy have steadily reduced balances, from a peak of 140 billion dollars to around 11 billion dollars by August 2025, according to official central bank figures.

The central bank said the decline has increased the share of lira deposits, strengthened monetary policy transmission, and reduced balance sheet risks. Furthermore, it is also expected to lower fiscal burdens, restore policy independence and boost market confidence.

Harun Turker, a faculty member at Ankara Medipol University, said declining KKM balances reflect growing trust in the lira and confidence in the new combination of monetary policy implemented during the disinflation process.

POLICY SHIFT, MARKET RISKS

The central bank said that ending the program does not signal an abandonment of financial stability and that the phase-out will include measures like higher lira deposit targets, adjusted reserve requirements and an end to tax exemptions to support policy transmission.

It said tight monetary policy will continue until inflation eases and price stability is achieved, while market transparency aims to attract capital inflows.

Analysts warn that with the end of the KKM, short-term volatility and market shocks are inevitable. The lira may experience larger swings in the near term, requiring investors to manage currency risks, but the policy shift could restore credibility over time.

"Banks may need to adjust funding structures," said Serpil Tuncer, a financial analyst in Istanbul. "With KKM gone, banks will rely on conventional lira deposits, government bonds and market instruments to absorb liquidity, which could widen lending-deposit spreads and prompt asset optimization."

He added that macro-level transparency and reduced fiscal pressures may improve Trkiye's investment environment.