Economy

Turkey seeks to curb foreign-currency borrowing

January 7, 2025, 8:44 AM

turkey foreign currency: Chefs at work in a bakery in Istanbul, Turkey. The central bank has eased its hold on growth in lira-denominated loans for SMEs — Chefs at work in a bakery in Istanbul, Turkey. The central bank has eased its hold on growth in lira-denominated loans for SMEs

Aim to reduce dollarisation
Change could hurt producers
Lira loan increase for SMEs

The central bank of Turkey has further tightened access to foreign currency borrowing by businesses, while opening the door for an increase in some lira-denominated commercial loans.

The country’s central bank last week announced it was lowering its ceiling on foreign currency loan growth to 1 percent a month, down from the previous upper limit of 1.5 percent.

The bank’s attempt to reduce dollarisation in the borrowing market came after it released data showing a 55 percent increase in foreign currency denominated commercial borrowing in 2024, with just over $168 billion worth of bank loans signed off on, the highest level since mid-2021.

This took foreign currency lending in Turkey to 48.4 percent of total commercial loans last year – up from 42.1 percent at the close of 2023.

The foreign currency component of commercial loans had eased in recent years, a result of the government encouraging lending to sustain high levels of growth, and the relatively low interest rates on offer for borrowing in lira.

Until February last year, the central bank’s own key lending rate, charged to private and public banks, was 8.5 percent, a level that fuelled growth but also fed into inflation, which topped 84 percent in late 2022.

In a shift in policy, the central bank lifted its lending rate to 50 percent by March last year, with commercial loans being charged at a rate of 55 percent or more, even with the reserve having cut its base rate to 47.5 on December 26.

These high fees resulted in an increased demand for foreign currency loans, which attract interest rates of between 6.4 and 7.8 percent for euro- or dollar-denominated loans.

The decision by the central bank to restrict lending in foreign currency could harm Turkish businesses, who will not be able to easily access loans in dollars or Euros but will still struggle with high interest rates on lira-denominated borrowings, Öner Günçavdı, an economics professor at Istanbul Technical University, told AGBI.

“I believe that the real sector [production and manufacturing] and industries will suffer from this move as many businesses in Turkey lack self-capital and base their management capital on credit loans,” he said.

“How will they be able to borrow? I do not see Turkish lira commercial loans coming down soon, not at least for the first quarter. I believe 2025 will be very difficult for the real sector.”

One segment of the business community will, however, find it a little easier to access funding, as the central bank is easing its hold on growth in lira denominated loans for small and medium-size enterprises (SMEs), allowing for a 2.5 percent increase in bank lending per month, up from the former limit of 2.0 percent.

However, the central bank’s largesse did not extend to other business borrowing, with the permitted growth levels for other commercial loans reduced from 2 percent a month to 1.5 percent.

This was an attempt to balance the need to support SMEs while keeping a lid on large-scale borrowing that could overheat the economy and fan inflationary flames.