Buying Time at a High Price: The Rise and Fall of Turkey’s FX-Protected Deposits

Introduction

During periods of heightened economic fragility, governments are forced to resort to unconventional measures to maintain financial stability. Turkey's FX-Protected Deposit Scheme, launched in December 2021, was introduced in precisely such an atmosphere. The primary aim was to halt the rapid depreciation of the Turkish lira, discourage domestic savers from turning to foreign currency, and boost confidence in the banking system. The policy was swiftly adopted by households, became a major item in banks’ balance sheets, and created notable fiscal repercussions. Yet in the following years, the rising costs triggered debates over its sustainability. This article aims to take a comprehensive look at the origin, operation, growth, and eventual termination of this application.

Global Perspective: Are There Similar Applications?

The FX-Protected Deposit Scheme was technically based on guaranteeing not only interest income but also exchange rate increases for deposits opened in lira. Such direct exchange rate guarantees are rarely seen in the literature. For example, in the past, some Latin American countries implemented foreign currency-indexed deposits known as “dual currency deposits,” while some Asian economies provided investors with inflation or currency protection through “indexed bonds.” However, these practices generally catered to a limited group of investors, mostly institutional investors.

Turkey's model, however, was on a different scale. This time, the system was open not only to banks or large companies but also to individual savers. As a result, the general public’s demand for currency protection was backed by the state. Thanks to this feature, Turkey's case with currency protection can be considered a unique example in international comparisons.

Origin in Turkey: The Crisis Atmosphere of 2021

The final quarter of 2021 was an extremely critical period for the Turkish economy. As inflation rapidly climbed to triple digits, the Turkish lira suffered sharp devaluations. As demand for foreign currency increased, market volatility intensified, and the Central Bank's reserves began to rapidly deplete. Under these conditions, the government announced the FX-Protected Deposit Scheme to reassure the public and instill confidence in the financial system.

The logic was simple: even if citizens opened deposits in lira, they would not be deprived of exchange rate gains, because the lira yield would be guaranteed against foreign currency. If the exchange rate increase exceeded the interest rate, the state would cover the difference. This aimed to reduce foreign currency demand in the short term, encourage a shift toward the TL, and curb exchange rate volatility.

Initially, the system was only available to individual investors. However, in the following months, institutional investors and companies were also allowed to participate in the system. Therefore, the scale of the application expanded rapidly. This policy was also attractive to banks because they were only obliged to pay interest, and the additional cost resulting from the difference between the interest and the exchange rate was borne directly by the budget or the Central Bank.

Growth Process and Statistics

FX-Protected Deposits reached a large volume in a very short time. By the end of 2022, the system's size had approached approximately $70 billion. By mid-2023, the volume had peaked, with the total climbing to between $120 billion and $140 billion. During this period, nearly one-third of total deposits in Turkey consisted of this instrument.

However, this rapid expansion imposed a notable fiscal strain. By the end of 2023, the total cost borne by public finances approached 1 trillion TL. Of this, 860 billion TL was covered by the Central Bank, which effectively expanded liquidity and weakened price stability. **There were also serious losses on the foreign exchange reserves side; according to calculations, reserves melted by approximately $85 billion during the 2022–2023 period.

Retrieved from TCMB

Impact on Banking and Financial Systems

For banks, the mechanism brought immediate advantages. FX-Protected Deposits provided banks with a more predictable and stable deposit base. This facilitated liquidity management. Academic studies have found a long-term positive correlation between the size of FX-Protected Deposits and the Borsa Istanbul Banking Index (XBANK). This correlation indicated that banks' balance sheets had strengthened, albeit temporarily.

However, the indirect effects of the application on the real sector were negative. This is because, as banks easily collected deposits through the system, the willingness to lend decreased. Thus, credit conversion rates fell. Put differently, financial intermediation weakened; banks safeguarded their balance sheets, yet businesses faced tighter credit conditions.

Retrieved from TCMB

Macroeconomic Outcomes: Inflation and Dollarization

One of the most important goals of the program was to reverse dollarization. In the initial phase, this goal was partially achieved; citizens preferred to keep their money in TL in the short term. However, this shift was not permanent in the long run. The reason for this was that the structure of the system was indexed to foreign currency. Even if savers opened deposits in lira, they were actually making investments tied to foreign currency returns. Therefore, in social terms, the perception of “foreign currency return guarantee” took hold instead of “trust in the lira.”

The effects on inflation were even more complex. During the 2022–2023 period, the program’s fiscal footprint widened the budget deficit and triggered monetary expansion with the Central Bank taking on the burden. As a result, upward pressure was created on the general price level. Even though exchange rates briefly stabilized, their impact on price stability was proven to be limited.

Estimated, compiled from publicly available data

Closure process: 2024–2025

Signs of a return to more orthodox policies in economic management emerged in 2024. It was clear that the costs of the FX-Protected Deposits had become unsustainable. In January 2024, new account openings were suspended, and existing accounts were only granted the right to renew at maturity. In February 2025, the ability to open and renew accounts for legal entities was removed. In January 2025, maturities were limited to 6 and 12 months. Finally, as of August 23, 2025, the mechanism was completely closed; existing accounts began to be liquidated without renewal at maturity.

During the closure process, the volume of the scheme declined rapidly. Its size, which peaked at $140 billion, fell to just $11.8 billion by mid-2025. Its share of total deposits fell to 2%. According to official calculations, the total cost of the system to the public was recorded at approximately $60 billion.

Years	FX-Protected Deposit Volume (USD)	Public Cost (TL)	USD Equivalent (estimated)	Share in Total Deposits
2022	70 billion USD	300 billion TL	15 billion USD	25%
2023	120-140 billion USD	860 billion TL	40 billion USD	35%
2024	100 billion USD	250 billion TL	10 billion USD	20%
2025	11,8 billion USD	20 billion TL	1-2 billion USD

Retrieved from TCMB, Reuters, and Bloomberg

Carry Trade Relationship

Another aspect of the application is its association with the “carry trade” in international financial terminology. Typically, a carry trade refers to borrowing in a low-interest currency and investing in another currency with a higher interest rate. FX-Protected Deposits in Turkey, however, became attractive to foreign investors by offering a foreign exchange rate guarantee in addition to the TL interest rate. This minimized risk and positioned the TL as a type of high-yield investment instrument.

However, with the closure of the system, this mechanism also came to an end. In the subsequent period, carry-trade opportunities began to take shape solely based on interest rate differentials. Ultimately, by removing the FX-indexed guarantee, Turkey shifted back toward conventional monetary policy tools.

Conclusion

The FX-Protected Deposit Scheme was Turkey's extraordinary response to the currency crisis at the end of 2021. In the short term, it calmed the panic in the foreign exchange market, strengthened banks' deposit bases, and convinced individual savers to keep their money in Turkish lira. However, in the long term, it created a substantial budgetary impact on public finances, depleted Central Bank reserves, and created pressure on inflation.

By 2025, the arrangement was fully phased out and substituted with orthodox monetary tools. Looking back, this policy served as a form of “buying time.” While it succeeded in curbing sudden spikes in the exchange rate in the short term, it failed to provide a lasting solution. Turkey's experience shows that the mechanism delivered short-term exchange rate stability, yet created lasting costs, suggesting that such tools may offer temporary relief rather than permanent solutions.

Written by: Onat Uzkan

Edited by: Defne Taykurt