Turkish Government at Odds Over Tax Breaks

Turkey

Economic News

22 Jul 2010
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Much of the subject of discussion amongst ministers in the last week has been whether to offer some industrial sectors tax breaks to help them deal with the continuing economic crisis or not. The proposal, made by the foreign trade minister Tunca Toskay on March 25th, was rejected by economy minister Kemal Dervis as it contravenes IMF requirements. Although this has again highlighted the differences within the Turkish cabinet, Ankara is managing to push through some more of the reforms required by the IMF in exchange for its considerable loans. Investors are eyeing March inflation data, the strength of the Turkish Lira and the passage of those laws now that fears of an imminent attack on Iraq have receded.



Toskay proposed on March 25th that some industrial sectors of the economy should be stimulated through tax breaks. Industrial production fell by 3.1% in January, which, although higher than most expectations was largely led by a strong energy sector, with some analysts claiming that the figures hide large contractions in other areas. Trade also slowed in February, with exports down 13% on the previous year and imports down 35%. Toskay's suggestion was in order to try and revive these sectors through "micro solutions" in "micro taxation" but without harming the budgetary targets of the economic programme. He cited the temporary VAT cuts on cars and white goods in November and December last year as precedents.



Ankara has been gearing up for a planned reform of its taxation system in order to increase government revenues as part of the agreement with the IMF. It has also pledged to tighten its fiscal and monetary policy to achieve a target 6.5% of GNP primary budget surplus in 2002. The programme targets economic growth of 3% in 2002, but early indicators are that this will be very difficult to achieve.



The cabinet minister most involved with the IMF programme Kemal Dervis was quick to counter Toskay's remarks, saying that "any cuts in VAT or other tax, even on a temporary or seasonal basis, are out of the question in 2002". He pointed out that there was no leeway in the IMF-backed programme for such tax breaks and dismissed the comments as "speculation" that may prematurely raise expectations of impacting tax reforms. These he said were planned for 2003, which would see a "comprehensive tax reform programme" to widen the tax base, introduce inflation accounting and rationalise the entire taxation system.



The minister of finance Sumer Oral said on March 25th that a new luxury tax designed to help the tax reform process would be voted on in parliament in April. Under the terms of the IMF loan the law has to be passed by the end of April as it is expected to reduce the burden of VAT on household staples, by replacing that revenue, and would combine a range of other taxes under a single item to bring Turkey's tax bureaucracy closer to that of the EU.



The debate between the ministers has continued and Toskay on March 26th countered Dervis by saying that his comments about speculation were "strange and not elegant". The discussion highlights differences in approach, with Dervis in favour of less government control in economic affairs and Toskay, from the right-wing National Movement Party (MHP) advocating more populist measures.



Prime Minister Bulent Ecevit entered the fray over state control on March 27th with comments that he believed the IMF programme may have "gone too far" in granting independence to regulatory bodies, state banks and the central bank. He hinted at reversing the process at the state banks through concerns that the public may not be able to stomach drastic job cuts, saying that he believed the government would have to look at the "issue of autonomy again".



All the same the Turkish parliament on the same day began debating the law on the management of the state's debt. This was a condition under the previous IMF programme and the parliament should have passed it in June 2001. The passage of the draft law, which is now a "prior action" requirement before the IMF board approves more loans to Turkey, should see the level of political involvement in the management of Turkey's debt reduced. It gives the treasury greater influence over the government's debt strategy and sets limits on its borrowing levels. The government had said that the draft law will be passed by the end of the month, and parliament did pass it on March 28th.



As Turkey has been trying to find ways to manage its public debt, investors have been watching the passage of this law and the further IMF "prior action" law to cut redundant state employees carefully. But the greatest boosts recently to the Istanbul Stock Exchange recently- that sent the 100 index to six-week highs on March 25th- have been the residual glow left from US vice-president Dick Cheney's visit and the POAS public offering.



Since then the market has been more hesitant, essentially waiting for March inflation data due to be published on April 3rd. As part of its new policy the central bank has again conducted a poll amongst businessmen on their inflation expectations, which this time sees consumer price inflation (CPI) expectations down to 2.5% for the month, from 2.6% in February. Brokers anticipate that if the inflation figures prove sufficiently optimistic the central bank may once again cut interest rates, helping to bring down the cost of the country's debt.



The central bank also announced on March 27th that it would buy $20m per day during April to try and boost its reserves after the year-long crisis had sucked billions from its reserves. As the move had been long anticipated and the amounts involved are not expected to shake the market too dramatically, analysts and investors have welcomed the announcement. In a measure to calm concerns that it may interfere with the exchange rate, the newly independent central bank, which has so far resisted intervention, said that it would not try to set the level of the lira, despite requests from some quarters that it do so. Exporters especially have complained recently that the lira is too strong, but even Ecevit in his March 27th comments denounced such a stance saying that he did not think the exchange rate was an obstacle to export-led growth.

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