Expert opinion on recent measure by BDDK: Could this decision pave the way to capital restriction?

A couple of days ago, the “Banking Regulation and Supervision Agency” (BDDK) decided to take coordinated steps to ensure the effective functioning of the credit system. Accordingly, companies whose TL equivalent of their foreign currency assets does not exceed TL 15 million will be able to be granted loans provided that they do not increase their foreign currency assets above TL 15 million. After the decision, the Dollar/TL exchange rate fell by close to 3 percent to below 17 TL.

Regarding the issue experts shared their comments and apparently there were not many to welcome this new measure as a positive development from the point of view of Turkish economy and real sector.

One of the very straight to the point evaluation and criticism came from a veteran economist one of the prominent experts in the sector, Mr. Mahfi EGILMEZ. Down below is an excerpt from his article regarding the issue.

“Many thanks to the author for his most valuable evaluation“

“… Another issue that needs to be addressed here is the issue of whether this decision is a foreign currency restriction decision or a decision on redirecting loans.

The fact that the BDDK (Banking Regulation and Supervision Agency) has taken this decision aims to provide the appearance that the decision was taken with the aim of directing loans. If this were a foreign currency restriction, as it really is, the decision would have to be taken by the Treasury and the Ministry of Finance.

No matter how it is presented, this is not a loan arrangement or referral decision. The decision to issue or direct a loan is based on a number of measures, such as putting a ceiling on loans (credit plan), imposing a time or amount restriction on the use of a loan, limiting or raising loan interest rates. This decision, unlike them, is aimed at foreign money indirectly, not at a loan, providing that there is no foreign money in excess of a certain amount among the conditions necessary for using a loan. Decisively, this decision is aimed at foreign money indirectly, not at a loan. Therefore, the BDDK does not have the authority to make this decision. This decision is a decision that must be taken within the framework of Decision No. 32 on the Protection of the Value of the Turkish Currency and by the Ministry of Treasury and Finance.

The decision taken by the BRSA cannot be the result of a mistake. The aim here is to show that this decision is unrelated to decision No. 32 and therefore does not mean the restriction of capital movements. However, this decision is a very clear capital restriction.

Result

In September 2021, a historic mistake was made in economic policy and the Central Bank turned to lowering interest rates in order to respond to populist pressures. While the Central Bank’s policy interest rate (weekly repo tender interest) was reduced from 19 percent to 14 percent gradually, exchange rates started to rise and drag on inflation one after another. Before the interest rate cuts started, the USD/TL exchange rate was 8.65 and the inflation rate (CPI) was 19.58 percent. Today, the exchange rate of USD /TL is 16.88, and inflation is 73.50 percent.

Billions of dollars in reserves have been sold to date in order to suppress the exchange rate in order to eliminate the great damage caused by the interest rate cut in all areas, “without increasing the interest rate”. Currency-protected deposit accounts have been put into effect and billions of TL of interest burden has been placed on the Treasury without any need. The budget had to be redone almost from scratch in the middle of the year. Paying for currency-protected deposit accounts was paid illegally in the first six months, and the budget right was ignored. In addition to all this, now powers are exceeded indirectly again and the path of capital restriction is being taken.

If you determine the interest correctly, it will not solve the issue on its own, but if you determine it incorrectly, it will bring a thousand kinds of trouble.”

medyascope.tv/2022/06/25/mahfi-egilmez-yazdi-bddknin-son-karari-cok-acik-bir-sermaye-kisitlamasidir/ (part of the content in this post was translated from this link)