Oct 10 2018

Albayrak’s sales tax rebates may fuel, not slow Turkish inflation

The Turkish government’s plans for an immediate refund in sales taxes for companies may inadvertently spur inflation.

It is unclear how the government will bring forward and pay for some 70 billion liras ($11.5 billion) in rebates promised by Treasury and Finance Minister Berat Albayrak on Tuesday. The measure, totaling half of all payments that the finance ministry will refund for this year, will be effective immediately, he said. The remainder will be paid at the start of 2019, he added.

However, Turkey’s Treasury has pledged to curb domestic borrowing and make budget cuts this year and in 2019 as part of plans to reduce inflation, which has surged to the highest level since 2003. Meanwhile, a currency crisis in the country and rate hikes by the U.S. Federal Reserve is limiting Turkey’s access to international financial markets.

So, it is likely that the government will have no other choice than to ask the central bank to print more money if it is to come good on the rebate. Money in circulation, including immediately withdrawable bank deposits, has grown by 24.4 percent this year, and by 28.8 percent annually, to 559.3 billion liras ($91.7 billion), according to the latest central bank data.

Printing money is inflationary, while curbing the money supply is commonly used as a tool by governments and central banks to slow inflation because it reduces banks’ ability to lend.

Albayrak announced the measure as part of plans to tackle accelerating inflation, which the government says is largely caused by supply costs, and to ease a slowdown in the economy. The rate of consumer price inflation surged to almost 25 percent annually in September. Producer prices jumped 46 percent, threatening to spur further increases in CPI.

The cash that Albayrak has promised is designed to free up capital for companies, some of whom are struggling to finance their operations after the lira tumbled almost 40 percent against the dollar this year. The currency’s slide has caused interest rates on commercial loans to jump to 30 percent or more as the central bank hiked its own benchmark rate to 24 percent.

The pledge to pay out the tax rebate also came as Albayrak said companies would reduce the price of their products by at least 10 percent to help the government slow the inflation rate. That threatens to squeeze company margins and hence fuel unemployment or bankruptcies.

As well as early payment of sales tax rebates, the government has pledged to freeze natural gas and electricity prices until the end of the year.

Banks have also agreed to extend the terms of some commercial debt and provide a grace period on the loan repayments of six months. This measure could pressure the money supply further.