Coronavirus wipes out a third of Turkey’s consumer spending
Turkey’s quarantining measures to curb the spread of the coronavirus, while stopping some way short of a full lockdown of the population, have helped lead to a record decline in domestic consumption.
Spending on credit and debit cards shrank by 31 percent in the week of March 20 to March 27 compared with a week earlier, and by 37 percent against spending in the last week of February, central bank figures show.
Weekly spending fell from 21 billion liras ($3.1 billion) to 13.5 billion liras, creating the biggest consumption shock since August 2018, when a currency crisis sent the lira to a record low of 7.2 per dollar.
The hardest hit businesses from the slump in expenditure were restaurants and bars, which the government shut down on March 15 as part of measures against the pandemic. Airlines have also lost record levels of revenue as the authorities placed heavy restrictions on travel. By March 28, flights were almost totally suspended.
The decline in expenditure at bars and other alcohol vendors was 86 percent. Spending on air travel dropped by 70 percent and at goldsmiths and jewellers by 68 percent. Purchases of clothing, a mainstay of economic growth and exports for Turkey, slid 57 percent.
Spending via credit and debit cards has climbed strongly in Turkey over the past decade, with many Turks using cash infrequently, save for taxis, public transport, household bills and for purchases at small local stores. Total spending reached 940 billion liras last year.
The expenditure constituted 38 percent of total household spending in 2019 and 22 percent of national income. Therefore, a decline is a key gauge of the extent of any economic contraction in Turkey.
The reduction in expenditure is likely to have accelerated after March 27 as the government brought in stricter measures on social distancing and population movement.
Aware of this downward trend, the Turkish authorities are now doing all they can to encourage people to spend more on their payment cards. The Banking Regulation and Supervision Agency has now taken a series of steps to encourage consumer activity, including reducing minimum payments of credit card debt to 20 percent of total from 35 percent to 40 percent previously.
Holders of credit cards may also postpone debt payments until the end of the year. The authorities previously permitted banks to block or cancel credit cards should clients miss three consecutive minimum monthly payments.
The central bank has also reduced monthly interest on payment cards to 1.25 percent from 1.4 percent, starting in April.
It is uncertain to what degree the measures will slow rapidly declining consumption in Turkey, but it is clear that the coronavirus outbreak will continue ravaging the economy, and with it the revenue the government relies on from taxes on consumer spending to help increase public expenditure and keep the budget deficit in check.
Turkey had planned to generate 264 billion liras of tax revenue from domestic goods and services sales this year, according to the budget. Tax income based entirely on spending constituted one-third of all expected tax revenue.
Turkish exports are shrinking sharply as well – carmakers are temporarily halting production and clothing manufacturers are predicting a slump in sales abroad of as much as 80 percent. That raises the prospect that Turkey could face both a budget deficit and a current account deficit.
A so-called “twin deficit” or “double deficit” is seen by economists as a flashing warning sign for an economy. Governments typically try to overcome a decline in tax revenue by borrowing more, leading to a squeeze in the availability of debt for the rest of the economy.
This can then result in pressure on interest rates just at a time when the government wants consumers and businesses to borrow more. It can also lead to further devaluation of the lira because the country fails to fund the current account deficit with revenues from other sources, like tourism, which is now also in crisis.
Ultimately such imbalances in the economy can lead to a full-blown crisis or a sizeable and very painful adjustment. Time is not on the government’s side.