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Mark Bentley
Apr 08 2019

Turkish inflation fears return as food, tobacco prices surge

Pressure on Turkish inflation may be intensifying again, spurred by an increase in food and tobacco prices.

Government stalls, set up earlier this year to sell food at below market prices, are shutting up shop. Meanwhile, a delayed price increase for cigarettes could hurt efforts to lower headline consumer price inflation (CPI) during April, according to local press reports.

Turkey’s government has sought to drive down the cost of food and other items after inflation surged to a 15-year high of 25.2 percent in October. The rate of price increases has slowed to 19.7 percent, but indications are that pressure on inflation could be returning.

Market stalls run by the government in city squares are closing one by one, pro-government newspaper Sabah reported on Monday. Meanwhile, Turkey’s agricultural cooperative is limiting sales of cheap food to five supermarket chains, and shelves are emptying as producers and “opportunists” build up following a spate of bad weather, it said.

The price of onions and potatoes, sold by the municipal shops for 2 liras a kilo, has surged to 4 liras for potatoes and 6 liras for onions, Sabah said.

Meanwhile, the cost of some cigarette brands has climbed by as much as 2 liras a packet to 15.5 liras ($2.72), according to local press reports, which cited a government tax hike, postponed since the start of the year. That will add one percentage point to inflation this month, Dünya newspaper said.

Government-run food stores are also shutting down after the ruling Justice and Development Party (AKP) lost control of major cities including Istanbul, Ankara and Antalya in local elections on March 31. The AKP is calling on the Supreme Election Board (YSK) to hold re-counts, citing alleged irregularities and “theft”.

The government’s target is to reduce inflation to 15.9 percent this year. Just prior to the election, Treasury and Finance Minister Berat Albayrak, the son-in-law of President Recep Tayyip Erdoğan, said he expected Turkey to easily beat the goal and price increases could slow to single digits by October.

But economists have warned that unconventional methods to reduce inflation could backfire and lead to an explosion in prices once campaigns and tax cuts end. The AKP, while hiking budget spending by 33 percent in February -- more than three times the pace of revenue increases -- has also lowered taxes on cars, home appliances, holidays and other items. Some of the discounts are due to expire at the end of June.

Inflation surged last year after Turkish consumers and investors sold the lira due to concerns about an overheating economy and a political crisis with the United States. The lira sank by 28 percent against the dollar in 2018.

After a brief rally, the lira has weakened again, falling about 7 percent this year to trade at 5.69 per dollar.

Albayrak is due to announce new economic measures this week to help allay investor fears about economic instability. The economy has shrunk for two straight quarters on a quarterly basis, meaning the country is now in a technical recession as it also battles with inflation.

But investors, concerned about pro-growth policies, are warning that further unconventional policies threaten to bring more losses for the lira, stoking inflation further.

The currency’s slide is causing financial problems for many companies that funded expansion with loans in foreign currency. The repayment problems are also pressuring the finances of the country’s banks. Turkish corporations, excluding banks, owe about $220 billion in foreign currency debt, equating to almost a third of Turkey’s GDP. Meanwhile, bad loans are on the rise.

A survey of manufacturers last month by IHS Markit and the istanbul Chamber of Industry on April 1 warned that rising prices in industry were pressuring overall inflation. Those concerns were echoed by the central bank last week. 

Any resurgence in inflation would threaten to deepen the economic downturn and put more companies in trouble as consumers pare back spending further.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.