Turkey Stops Lending to FX-Rich Companies

On Friday, Turkey put a stop to lending to companies that have foreign currency cash of more than $1 million. This is the latest step that the government has taken to reverse a falling foreign-exchange rate. It is increasing pressure on businesses and banks to do so and this certainly seems to be working because a 5% gain was recorded in the Turkish Lira.

New rule

The announcement from the state regulator was made after the closing of most local markets. It dictated that businesses in possession of more than 15 million Lira, which is around $908,000 in foreign cash assets, will not be able to obtain new loans in Lira. This is applicable if these forex assets are more than 10% of the annual revenues and total assets of the company.

Inflation in Turkey soared to new heights after the crash of the Lira back in December. Since then, the Turkish government and central bank have been introducing different measures to resolve the problem and this new rule is the latest one. The banking watchdog stated that this measure would give financial stability a boost.

According to analysts, there could be a further increase in the Lira when markets open on Monday. This is because a number of small and medium-sized businesses would be forced to convert their foreign exchange assets into the currency in order to have access to credit.

Lira gets a boost

The Lira rose against the US dollar to 16.4975, which is the strongest it has been in the last three weeks. At 1904 GMT, the currency had climbed by 3% to 16.85, which was its best trading day this year. A series of cuts in the interest rates by the central bank under the orders of President Tayyip Erdogan had resulted in the currency crisis for Turkey.

Last year, the Lira had lost about 44% of its value and there has been a fall of 22% this year as well because of concerns about the monetary policy. The official reserves have also been depleted and the current account deficit has also gone up. More than half of the deposits in the country are in the form of hard currency, as this can work as a hedge against inflation and Lira depreciation. The new measure seeks to reverse this problem.

Inflation rises

The depreciation of the lira and the consequences of the Russian invasion of Ukraine has sent the annual inflation in Turkey soaring to 73.5%, which is a high of 24 years. Household budgets have become strained just ahead of the elections in the next year.

The newest lending restriction will also the central bank and the state institutions to adopt a dominant position in the forex market. Some of the other measures that have also been implemented include an FX-protected deposit scheme backed by the government. Furthermore, exporters are also mandated to sell a portion of their forex revenues to the country’s central bank. All of these are meant to give the currency a boost.