Looking at the economy these days, there are things that I understand and there are things that I have difficulty in understanding.

The recent rapid rise in retail foreign exchange (FX) bank deposit accounts speaks of volumes, if you ask me. Just this week, the government decided to raise the witholding tax rate on interest income from FX accounts. Let me explain what I am hearing, and why all this is important.

The rise in FX deposit accounts means that Turkey needs a plan, a credible one, and we need it fast. Here Turks share the views of foreigners, as I noted last week.

Yet it also shows that Turks are not that optimistic about having a plan right after the election. Realistically speaking, it will take some time for a credible plan to take shape. Execution also matters however, and considering the gap between planning and execution, Turks prefer to park their money in dollar-denominated somethings.

Then, and I find this rather significant, Turks trust their own banking system for this portfolio shift from Turkish liras to American dollars. Despite all the turbulence in recent months, there has been no exodus from the banking system. No exodus from the country. It was not like that in Russia when they had similar difficulties with declining oil prices. Note also that in Venezuella, crypto currency trading has increased to cope with the rising risks. Turkey is no Russia or Venezuella. Rather good news, I have to say. Things are going to be rough for a bit, but the country is built to withstand it.

Then this week the Turkish government has raised the witholding tax rate on the interest income of retail foreign exchange (FX) deposit accounts. That I certainly do not understand. It feels like an exemplary famous last word, like a professional paratrooper showing you the thumbs up, then jumping without his parachute on.

The rapid rise in FX deposits has nothing to do with returns on these accounts. No one is buying FX for interest income. It is not a normal portfolio decision motivated by relative returns where tax rates may affect the consequences. The latter is flight for confidence, a safe haven, if I may say so. Neither the interest rate on FX deposits nor the witholding tax rate for interest income are matters of concern here. It is the exchange rate adjustment that will carry your purchasing power from today into tomorrow.

That’s worrisome, especially when Turkey is still confronted with so much political risk.

This commentary was published in Hürriyet Daily News on 23.03.2019