Turkey's lira fell as much as 6% on Thursday, extending a four-day slide after last week's big gains, as the government struggled to convince savers to ignore the volatility and worries over surging inflation and unorthodox rate cuts.

While Finance Minister Nureddin Nebati said Turks' dollar holdings have been falling, official data showed that local holdings of hard currencies soared to an all-time high of almost $239 billion last week. 

At the same time the central bank's net foreign currency holdings - its effective buffer against financial crisis - plunged to nearly a two-decade low. 

The lira has shed as much as 20% in four trading sessions, reversing a more than 50% rally over the previous five days which was triggered by a new state scheme to protect local deposits from depreciation losses versus hard currencies.

The currency weakened as far as 13.4 to the dollar before recovering to 13 by 1315 GMT, still down 3% on the day. It has swung from 18.4 to 10.25 in the last two weeks, a dizzying ride for Turks who have seen their savings depleted and household budgets upended.

The fast-moving currency crisis was set off by a series of aggressive interest rate cuts beginning in September that were sought by President Tayyip Erdogan under his "new economic programme" focused on exports and credit.

Economists and opposition lawmakers called the policy easing reckless given inflation had climbed above 21%, and is expected to soar beyond 30% this month and in the months ahead, due primarily to the sharp lira depreciation.

Nebati - whom Erdogan appointed earlier this month - has given a series of televised interviews and said late on Wednesday the volatility was not worrying.

He predicted single-digit inflation by 2023, which is much more optimistic than analysts' views.

Nebati also said there were no state interventions to sell dollars and boost the lira last week, despite the data showing reserves fell in what bankers and economists said reflected state-backed market support.

THIN BUFFER

Central bank data showed its net international reserves hit $8.63 billion last week, their lowest since 2002, from $12.16 billion a week earlier. read more

The central bank has announced five direct interventions this month to support the lira, which bankers say totaled $6-$10 billion. There were no intervention notices in the last two weeks, when the reserves began to plunge.

The bank's gross forex reserves fell $5.81 billion to $72.56 billion last week, the data showed. 

Foreign currency and gold held by Turkish locals reached $238.97 billion last week. Adjusted for the parity effect, the holdings rose $1.46 billion, while those of individual investors alone fell by $136 million.

FX held by Turkish locals

The scheme unveiled by Erdogan is meant to reverse the tide of dollarisation. Under it, the Treasury or central bank cover the difference between deposit rates and the foreign exchange and gold rate for lira converted into the new instrument.

Many economists and political analysts warn that if the lira continues to depreciate, the scheme could stoke inflation and add to the state's fiscal burden.

"The emergency measures put in place are only going to give short term relief; in the long term, they seem likely to exacerbate the crisis," said Howard Eissenstat, associate professor of Middle East history at St. Lawrence University in New York State.

Nebati said on broadcaster CNN Turk that 59.8 billion lira ($4.60 billion) were in the protected deposits as of Wednesday. He said local investors' foreign currency deposits declined by $7 billion to $162 billion since the scheme was announced.

Some analysts told Reuters the deposits scheme and a 50% minimum wage rise could pave the way for Erdogan to hold snap elections before scheduled in 2023. 

($1 = 12.9914 liras)

Reuters