Use of foreign currency banned in contracts between Turkish citizens

The Presidency of the Republic of Turkey issued a new Presidential Decree (Decree No: 85) in the Official Gazette dated September 13th, 2018 and numbered 30534, which prohibits use of foreign currencies in contracts between Turkish residents. This decree is an amendment to Law No. 32 on Protection of the Value of Turkish Currency.

Turkish residents acting as party to contracts with other Turkish residents are prohibited from using foreign currency (including Turkish Lira indexed to foreign currency) in determining the  value and payment liabilities of contracts listed as follows:

a) Contracts re. purchase and sale of any movables and immovables (i.e. real estates),

b) Contracts re. rental of any movables and immovables including car rentals and financial leasing contracts,

c) Leasing contracts,

d) Employment contracts,

e) Service contracts,

f) Contracts of work.

The Amendment also states that, save for the exceptional cases to be determined by the Ministry of Treasury and Finance, existing contracts between Turkish residents determined in foreign currency or foreign currency indexed Turkish Lira liabilities shall be revised as to define the liabilities in Turkish Lira only within 30 days following the issuance of this decree of amendment (13.09.2018).

The prohibition is applicable for contractual liabilities between Turkish residents only, and therefore not applicable for contracts between Turkish residents and foreign persons or foreign entities. Turkish residents refer to all real persons and legal entities residing or incorporated in Turkey, and therefore companies incorporated in Turkey by foreign persons or foreign entities will also fall under the scope of this prohibition, even where the shareholding of such companies is fully owned by foreigners.

The Amendment clearly bans new contracts to be linked to foreign currency. However, the requirement to revise existing contracts linked to foreign currency does not mention any mandatory principle in the selection of the exchange rates for conversion of foreign currency liabilities in existing contracts into Turkish Lira. It is understood that parties are permitted to define the conversion rate through mutual agreement.

The status of existing contracts with foreign currency liabilities where the relevant parties have already made necessary payments in foreign currency in advance is also vague.

This amendment will have particular impact on retail tenants of shopping malls, where contract are generally denominated in foreign currency. This development will come as a great relief to the retail trade which is already suffering from a fall in consumer demand as a result of the oncoming recession.

Many of the Turkish government’s own contracts, including for building motorways and operating airports, are currently priced in US dollars or euros. The government has yet to clarify the new rules, and it is unlikely that the required amendments will be completed within the allotted time period. Much chaos can be expected.

There is now concern that the government’s efforts to contain inflation by indexing everything to Turkish lira may be extended to foreign currency deposits.  About half of the Turkish banking system’s deposits are in foreign currencies.