Turkey's central bank is already reviewing the Erdogan government's new rules and trying to encourage the conversion of foreign currencies into local currency

Turkey limits bank lending to maintain cash reserves

REUTERS/CAGLA GURDOGAN - Logo of the Central Bank of Turkey at the entrance of its headquarters in Ankara, Turkey.

Turkey is launching its latest attempt to halt the decline in its cash reserves by imposing restrictions on bank lending. The Turkish central bank is studying different rules that would allow it to keep the growth of loans under control and encourage the conversion of foreign currencies into the Turkish lira.  

This measure is in addition to others adopted by the Ottoman government to try to curb the economic crisis and the collapse of the lira, which has depreciated by 40% against the euro, according to the digital newspaper La Marea. To avoid a major economic catastrophe, Turkey has implemented various measures that until now have focused on exporters' banks and the service sector, but which for the first time focus their efforts on halting the erosion of cash. 

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The main novelty of this new rule is that the reserve requirements, which until now only applied to companies' liabilities, will also be applied to assets, as reported in a communiqué issued by the Turkish Central Bank. However, not all companies will have to abide by this new legislation, since small and medium-sized companies in the country will be exempt, but loans for agriculture and exports will have to abide by it. 

Although the Turkish government sees this measure as the salvation of the economy, experts who follow the economic situation in Turkey believe that it is a risky move. Restrictions on lending could increase taxation and economic inequality within the country, which in turn could destabilise the lira again. In addition, cash restrictions could also slow down the activity of small and medium-sized enterprises, which in the long run could translate into a collapse of the national economy. 

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Turkish households suffocated by inflation 

The sharp fall in the value of the lira has led to a sharp rise in prices for all products and services. Inflation in Turkey is already over 60 %, although some independent studies say it could be twice as high. At the moment, the price of olive oil has risen by 150%, and bread, which is consumed in large quantities during Ramadan, has become 30% more expensive and has shrunk in size. In addition to the rise in food prices, there has also been a rise in the price of energy such as electricity and petrol. 

The lira's slump is mainly due to the economic measures imposed by Turkish President Recep Tayyip Erdogan on the Central Bank. Turkey's banking regulator has been cutting interest rates to 14%, despite the fact that domestic inflation is up to four times higher. These measures have been taken contrary to the opinion of most economists, who prefer to keep interest rates in line with the level of inflation or even higher, otherwise interest rates will go into the red. 

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New economic measures in Turkey 

The fall in the value of the lira puts Turkey in a very difficult situation that the government is trying to tackle on several fronts. According to legislation approved by Erdogan's government, commercial loans extended since the beginning of this month may not exceed 10% of the demand requirement. The Central Bank has also raised reserve requirements for personal accounts with lenders, but this measure did not achieve its goal of converting accounts with foreign currency figures into lira. 

Some economists believe Erdogan wants to keep the lira devalued to boost tourism and exports, two of the main pillars of the Turkish economy, but both markets have been severely affected by Russia's invasion of Ukraine. Turkey is one of the countries that maintains trade relations with Russia and Ukraine in several sectors, and although it is one of the countries that has not sanctioned Moscow, the war has collapsed a trade market that was worth 400 billion euros a year, according to La Marea. The Turkish textile sector has announced that it is suffering losses amounting to 200 million euros a week due to the cancellation of shipments to Ukraine. The tourism sector is also at risk and is afraid of losing Russian tourists, who are Turkey's most popular visitors. 

 

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