2.2 Operational Framework of Monetary Policy

2.2.1 Turkish Lira Liquidity Management

In 2023, CBRT funding was carried out through Open Market Operations (OMO) and swap transactions against FX and gold. Accordingly, the amount of swap transactions, which was TRY 883.4 billion as of 2023, increased by TRY 506.5 billion and rose to TRY 1,389.9 billion as of December 29, 2023. Net OMO, which was TRY 167.8 billion in the early 2023, dropped by TRY 531 billion and net TRY 363.2 billion was sterilized from the market via OMO as of 29 December 2023. In 2023, required reserves framework adjusted from the perspective of quantitative tightening, and monetary base developments with the rise in the net domestic borrowing amount of the Ministry of Treasury and Finance added to the funding requirement of the system, while the FX protected deposit transactions, export proceeds, rediscount credits, other FX generating transactions and direct purchases of GDDS injected liquidity and reduced the funding need of the system. Funding need of the system followed a volatile path throughout 2023 due to adjustments in the required reserves framework and FX transaction of CBRT. Compared to early 2023, the funding need of the system reduced by TRY 24.5 billion to TRY 1,026.7 billion as of 29 December 2023.

In the second half of 2023, the compensation of exchange rate depreciation on FX-Protected Deposits (KKM) and FX transactions, which injected TRY liquidity, led to temporary liquidity surplus episodes in the system, and resulted the CBRT to become net borrower in the OMO. The excess liquidity was sterilized through various instruments to bolster the effectiveness of the monetary transmission mechanism.

Accordingly,

• KKM deposits included within Required Reserves (RRs) framework, and RR’s framework adjusted with maturity-based differentiation.
• Additional RR were introduced to FX-denominated deposits to be maintained in TRY.
• TRY deposit purchase auctions were launched as of 22 December 2023.

In the first half of 2023, to maintain instrument diversity and operational flexibility in liquidity management, the OMO portfolio supported by the purchase of nominal TRY 94.5 billion worth of securities, including nominal TRY 39 billion worth of GDDS through traditional auctions, and nominal TRY 55.5 billion worth of GDDS through auctions held under the primary dealer outright purchase facility. Meanwhile, a total of nominal TRY 8.8 billion worth of securities was purchased through outright purchase auctions via quotation. In the second half of 2023, outright purchase auctions were suspended in line with the quantitative tightening measures.

2.2.2 Foreign Exchange Liquidity Management

The floating exchange rate regime continued in 2023, and exchange rates were determined under free market conditions according to supply and demand balance. In addition, the CBRT has no commitment to any exchange rate level under the current exchange rate regime. However, to ensure efficient functioning of the FX market and promote healthy price formation, the CBRT continued to closely monitor exchange rate developments and related risk factors as well as to take the necessary measures and employ suitable instruments. Accordingly, some of the FX liquidity obtained from the sale of exporters’ foreign exchange to the CBRT was supplied to the market to meet the liquidity deficit in case of the market needs. Meanwhile, effective from 3 July 2023, the liquidity need in the FX market that may arise at maturity dates of Turkish lira deposit and participation accounts converted from FX or gold accounts started to be met via CBRT’s outright FX sales to banks against Turkish lira.

In 2023, within the framework of TRY currency swap transactions, the CBRT provided funding through swap auctions conducted via the traditional method with maturities of two weeks, one month, two months and three months and swap market transactions conducted via the quotation method with a maturity of one week. As of 29 December 2023, the outstanding amount of TRY currency swap auctions was USD 41.8 billion, while the outstanding amount of TRY currency swap market transactions was USD 4 billion.

TRY-settled FX forward transactions at the BIST Derivatives Market (VIOP) continued in 2023. Additionally, to increase instrument diversity, TRY-settled FX forward selling transactions at the CBRT started on 14 April 2023. Meanwhile, the CBRT’s total short position amount, which reached USD 9.6 billion in June, was reduced gradually in the remainder of the year and decreased to USD 157 million as of 29 December 2023.

To increase the effectiveness of banks’ liquidity management and contribute to the bringing of gold savings into the financial system, the CBRT continued to conduct TRY/FX gold swap transactions in 2023. As of 29 December 2023, the net outstanding amount of TRY gold swap market transactions conducted via the quotation method was 14.6 tons, the net outstanding amount of FX gold swap market transactions was 19.3 tons, and the net outstanding amount of TRY gold swap auctions conducted via the traditional method was 31.4 tons. There is no FX/Gold Swap Market transaction on the sell side. In 2023, a portion of the increased domestic demand for physical gold was met by the CBRT through gold sale transactions at the. BIST Precious Metals and Diamond Market and location swap transactions. Moreover, the CBRT continued to purchase gold ore purchases against TRY for reserve accumulation purposes.

In 2023, in tandem with developments in global interest rates, the interest rate applied to collateral FX deposits was gradually increased from 4.25% to 5.50% for the US dollar, and from 2.5% to 4.00% for the euro across all maturities. The interest rates applied to FX deposits that banks can borrow from the CBRT were gradually raised from 6.75% to 7.75% for one-week and from 7.50 to 8.50% for one-month maturity for US dollar, while those for the euro were gradually increased from 4.50% to 6.00% for one-week and from 5.00% to 6.50% for one-month maturity.

2.2.3 Reserve Requirements and Securities Maintenance

2022 was marked by measures to convert foreign currency (FX) deposits to KKM accounts, while the focus in 2023 was on prioritizing TRY deposit accounts.

In the second half of 2023, the CBRT took comprehensive simplification steps in RR and securities maintenance practices as part of the micro- and macroprudential policies to increase the functionality of market mechanisms and strengthen the monetary transmission mechanism in line with the monetary tightening policy. In the last quarter of 2023, policies to promote TRY deposits were supported by charging commissions on the RR to be maintained for FX deposits.

Accordingly, the CBRT pursued policies to increase the share of TRY deposits in total deposits, convert KKM accounts into TRY deposit accounts and to implement selective credit and quantitative tightening. On one hand the decline in the KKM balance became more pronounced, on the other hand the excess liquidity in the financial system was sterilized through various instruments to enhance the effectiveness of the monetary transmission mechanism. Moreover, the obligation to maintain securities for FX liabilities was gradually reduced and attained a level that would not create an additional demand for securities under existing conditions.

To mitigate the negative effects of the earthquake that occurred on 6 February 2023 and to contribute to the recovery, it was decided to exempt the loans extended to the earthquake zone from the RR and securities regulations until 31 August 2023. The effective period of this practice was extended first until 1 January 2024 and then until June 2024.

In 2023, within the scope of the RR practice, steps were taken to prioritize long-term TRY deposits and to increase the RR liabilities on KKM and FX deposits. On the other hand, exemption from the RR ratio for the increase in the items that qualify as external funding was introduced.

Effective from 20 January 2023, to encourage the maturity extension of TRY deposits, RR ratios for TRY deposit accounts with maturities longer than three months were set at 0%. Additionally, it was decided to set RR ratios at 0% for the increase in FX liabilities with maturities longer than six months provided directly from abroad first until the end of 2023, and then until the end of 2024.

To prioritize TRY deposits and sterilize increased liquidity, the RR ratio for KKM accounts was first increased from 0% to 15% as of 21 July 2023. Subsequently, the maturity-based differentiation was introduced to RR ratios and they were set as 25% for the KKM accounts with maturities up to six months (inclusive) and 5% for those with longer maturities, effective from 1 September 2023. These ratios were increased by 500 basis points for all maturities to be effective as of 27 October 2023.

Regarding FX RR ratios, effective from 18 August 2023, the RR ratio for demand deposits and deposits with maturities up to 1 month (excluding deposits/participation funds and precious metal deposit accounts of banks abroad) was increased from 25% to 29% for FX liabilities. Effective from 27 October 2023, the RR ratios for FX deposits (excluding deposits with banks abroad and precious metal deposit accounts) were increased by 100 basis points for all maturities, and an additional RR of 4% was introduced to these liabilities to be held in TRY for all maturities. Regarding the additional 500 basis points FX RR ratio based on the KKM-included TRY share, in the second quarter of 2023, first, the target TRY share was lowered and then the practice was terminated effective from 18 August 2023 for simplification purposes.

As part of the simplification process, the requirement to maintain 20% RR for TRY-denominated cash loans extended by financing companies was cancelled as of 24 November 2023.

As announced at the end of 2023, the Reserve Option Mechanism (ROM), which enabled maintenance of TRY RRs in gold, was terminated on 23 June 2023.

As of the calculation date of 22 December 2022, the average weighted TRY and FX reserve requirement ratios were 11.9% and 22.8%, respectively (Charts 2.2.3.1 and 2.2.3.2).

As of 22 December 2023, TRY liabilities subject to reserve requirements amounted to TRY 8,519 billion and FX liabilities amounted to TRY 8,2421 billion. As of the maintenance period of 5 January 2024, USD 64.2 billion worth of FX and USD 7.4 billion worth of gold have been maintained for FX liabilities. As of the maintenance period of 5 January 2024, the amount of additional RR required to be maintained in TRY for FX deposits/participation funds (excluding deposits/participation funds of banks abroad and precious metal deposit accounts) is TRY 190.8 billion (Charts 2.2.3.3 and 2.2.3.4).

Regarding simplification in securities maintenance practice, in the second half of the year, additional securities maintenance based on the conversion rate from FX deposits to KKM accounts and KKM-included TRY share were terminated; the securities maintenance ratio for liabilities was reduced; securities maintenance was terminated for monthly loan extensions and purchases of securities issued by the real sector; and liabilities imposed on loans not extended against expenditure were abolished. Moreover, the securities maintenance based on the interest rate/profit rate over current loan extensions of banks/factoring receivables of factoring companies was terminated.

Regarding the securities implementation, the securities maintenance ratio for FX liabilities was raised from 5% to 10% effective as of February, and was first reduced from 10% to 5% in June and then to 4% effective as of November in view of the gradual approach to simplification of the micro and macroprudential policy framework based on impact analyses. Moreover, in the second half of the year, additional securities maintenance practices based on the conversion from FX deposit accounts to KKM accounts and additional securities maintenance practices based on the KKM-included TRY share were terminated.

To contribute to the strengthening of macro financial stability, a target was introduced in the securities practice to shift from KKM accounts to TRY time deposits, to renew these accounts at certain rates, and to increase the ratio of TRY deposits excluding KKM. In October, these targets were also removed from the securities maintenance practice and included in the commission implementation on RRs maintained for FX deposits.

Gradual simplification was made in securities maintenance based on flow loan extensions, loan interest rate and loan growth rate.

In October, the securities maintenance practice applied to banks at a rate of 30% based on TRY commercial loan extensions together with the requirement of document against expenditure for the types of loans exempted from this practice, was abolished. Moreover, the securities maintenance practice applied at a rate of 30% on securities issued by the real sector and purchased by banks was terminated.

In April, the securities maintenance ratio applied as 90% for the second tier based on the loan rate was increased to 150%. In July, the first tier was removed for TRY commercial loans excluding export and investment loans based on the interest rates and the interest rate cap was applied as a single tier. In August, the single tier practice was introduced for all loans. In October, the security maintenance practice based on the interest rate/profit rate for TRY commercial loans excluding export and investment loans of banks and factoring receivables of factoring companies was abolished. This practice was terminated for all loan types at the end of 2023.

Regarding selective credit and quantitative tightening decisions together with the process of monetary tightening, in securities maintenance based on monthly growth limit for TRY commercial loans of 3% was reduced to 2.5%. Growth limit for vehicle loans was reduced to 2% from 3%, and for general purpose loans was kept at 3% in August. Export, investment, agricultural and tradesmen loans as well as loans extended to public institutions and organizations were excluded from this limitation. The effective period of this practice was extended from December 2023 to June 2024.

Table 2.2.3.1: Securities Maintenance Ratios (%, as of Calculation Periods)

2.2.4 Rediscount Credits

Governed by Article 45 of the CBRT Law, rediscount credits for exports and FX earning services are extended to exporters and firms that engage in FX earning services and activities to finance them at affordable costs. These loans are made available at maturities of up to 360 days by accepting TRY and FX-denominated bills for rediscount via intermediary banks based on the TRY equivalent of the bills. Repayments to the CBRT are made in either FX or TRY, depending on the currency in which the bills are issued.

Effective from 1 January 2023, the total limit for rediscount credits was converted from US dollar to Turkish lira and set at TRY 405 billion. Firm-based credit limits were determined as; for Small and Medium-Sized Enterprises (SMEs), half the maximum annual net sales revenues or financial balance sheet amounts set for micro, small and medium-sized enterprises in subparagraphs (a), (b) and (c) of the first paragraph of Article 5 of the “Regulation on Small and Medium-Sized Enterprises” published in the Official Gazette of 25 May 2023 and No. 32201, TRY 4.5 billion for firms engaged in FX earning services, export intermediaries and firms operating in the defense industry and TRY 2.5 billion for other firms.

In 2023, the following changes were made in the rediscount credit implementation:

• For companies based in the provinces hit by the earthquake disaster in Türkiye (Adana, Adıyaman, Diyarbakır, Hatay, Gaziantep, Kahramanmaraş, Kilis, Malatya, Osmaniye, Şanlıurfa): i) An interest-free maturity extension up to 180 days was granted for repayment of rediscount credits for export and FX earning services as well as advance loans against investment commitment with a due date between 6 February 2023 (included) and 30 April 2023 (included), ii) An additional export and FX-earning services commitment fulfillment duration of six months was introduced for those rediscount credits for export and FX-earning services that had been used before 6 February 2023 (included).
• As of 25 July 2023, the following decisions were taken to support exporters’ access to financing:
• The daily limit for rediscount credits was raised to TRY 1.5 billion.
• Increasing the SME share in rediscount credits and export growth performance were taken into account when extending credits.
• Conditions to access rediscount credits were eased as part of the simplification process. Accordingly, the requirement to sell an additional 30% of export proceeds to use rediscount credits was abolished, and foreign currency purchases for import payments were exempted from the scope of the commitment not to buy foreign currency during the rediscount credit term.
• As of 12 September 2023, the daily limit for rediscount credits was increased to TRY 3 billion from TRY 1.5 billion to support selective credit utilization and exporters’ access to finance.
• As of 22 September 2023, Turkish lira rediscount credits were subject to the interest rate calculated based on the formula set instead of the policy rate, to ensure that the interest rates applied to these credits reflected the spot loan cost instead of the discount rate.
• As of 23 November 2023, the maximum discount rate for rediscount credits for export and FX earning services was kept unchanged at 25.93%

In 2023, a total of TRY 398.12 billion of rediscount credits were extended with a breakdown of TRY 57.45 billion in foreign currency and TRY 340.67 billion.

In 2023, originating from currency swap agreements, rediscount credits amounting to CNY 721.12 million (USD 100.2 million) were extended to finance trade or investment activities in local currency between the Republic of Türkiye and the People’s Republic of China; and UAE 136.68 million (USD 37.21 million) were extended to finance trade or investment activities in local currency between the Republic of Türkiye and the United Arab Emirates (UAE).

2.2.5 Advance Loans

Advance Loans Against Investment Commitment (ALAIC) are extended pursuant to Article 45 of the CBRT Law through intermediary banks to firms for financing investments that help narrow the current account deficit, by accepting TRY-denominated bills for advance, at a maximum maturity of 10 years and with a maximum grace period of two years. As part of the first ALAIC financing that took effect on 5 June 2020, the CBRT policy rate - 150 basis points was applied to these loans. The purpose of this investment program is to support highly efficient investments that will reduce imports and boost exports, diminish external dependence and the current account deficit, and support sustainable growth, in tandem with the price stability and financial stability objectives. The new ALAIC program that entered into force on 24 November 2023 aims to put into practice large-scale, high-tech and strategic investments through investment loans. The new ALAIC program has been allocated an annual limit of TRY 100 billion.

By December 2023, the following changes were made in the ALAIC implementation:

Under the new ALAIC program enforced on 24 November 2023:

• The application process begins with an evaluation by the Ministry of Industry and Technology of the firms’ technical competence and capacity required for the implementation of investments. Applications are then made to the CBRT via intermediary banks by submitting the Technology/Strategy scores (TSS) given at the end of the evaluation process together with other necessary documentation. The application process is finalized with an evaluation made by the CBRT.
• The minimum investment amount is set at TRY 1 billion. The amount of loans to be allocated for the investment is limited to a maximum of 70% of the total investment amount, provided that it does not exceed TRY 5 billion, the maximum limit per firm.
• It is stipulated that at least 20% of the total investment amount would be financed by equity.
• It is also stated that investments that receive a negative evaluation by the CBRT with regard to their potential for lowering inflation and the current account deficit will not be eligible for such loans.
• Investments with no TSS but considered positive by the CBRT in terms of reducing inflation or the current account deficit will be eligible for the ALAIC. Applications for such investments are made directly to the CBRT via intermediary banks.
• The interest/profit share rate applicable to ALAIC loans is determined based on the TSS. Investments with a TSS of 85 or above, or investments without a TSS but approved by the CBRT will be subject to an interest/profit share rate of 23%, while investments with a TSS below 85 will be subject to an interest/profit share rate of 30%.
• Investments with a ratio of external financing to total investment amount of 20% or more, and firms with high financial soundness were entitled to a discount of 500 basis points and 300 basis points, respectively, on the applicable loan rate.
• In order to be eligible for the ALAIC credit program, firms should have a net FX position below 5% of their total assets and should not have account balances under any CBRT protection against exchange rates/price changes.
• Except for the firms operating in the defense industry sector, loan beneficiaries should undertake that all contracts to be made with residents in relation to the ALAIC investment and related pricing shall be in Turkish liras, and that the pricing and sales of the investment-driven goods/services to be produced for/provided to the residents will be made only in Turkish liras.

For loans under the ALAIC program dated 5 June 2020, the aforementioned instructions remain valid with following amendments:

• The implementation of allocating separate limits for industrial and tourism investments in ALAIC applications was terminated.
• The CBRT may deem it appropriate to allocate a credit/financing limit of up to TRY 2.5 billion for investments with a total fixed amount of TRY 1.5 billion or more for firms that produce renewable energy or high-tech products that will reduce carbon footprint as part of sustainable, strategic and green transformation.
• The obligation for defense industry firms to use Turkish lira as currency in contracts engaged in with residents in relation to the ALAIC investment, and related pricing was terminated.
• For the ALAIC program, the commitment to not purchase foreign currency during the credit period and the obligation to sell foreign currency to the CBRT were abolished.
• The discount rates on the interest/profit share applicable to loans were increased tenfold based on the commitments made regarding investment location, use of domestic machinery and provision of financing from abroad.

By the end of 2023, TRY 86.58 billion was used out of the total loan allocation of TRY 111.11 billion under the ALAIC to investing firms through banks.