Inflation top priority as Turkey unveils new steps to shore up economy

Turkey on Thursday and Friday announced several new measures to support the economy, with authorities saying reining in inflation remained the top priority, in addition to encouraging savings and bolstering the Turkish lira.

The Treasury and Finance Ministry said it will issue domestic bonds indexed to the revenues of state enterprises to encourage lira asset savings, the central bank raised the required reserves ratio for lira commercial cash loans, and the banking watchdog tweaked a maturity limit for consumer loans.

“The fight against inflation remains a top priority. In this struggle the importance of coordination between institutions is clear and all our institutions are acting with the understanding of a joint struggle,” a statement by the ministry said on Friday.

The announcements came after the authorities said a series of new “solution-oriented steps” would be announced on Thursday evening, seeking to curb inflation and support the lira.

Treasury and Finance Ministry said it will start assessing demand for the so-called revenue-indexed bonds on June 15. The new domestic debt instruments would have a minimum yield guarantee in coupon payments, it noted.

A statement earlier Thursday had stressed Turkey’s status as a free market economy.

“Unfortunately some circles take all opportunities to recklessly question Turkey’s status as a free market economy with a liberal foreign exchange regime,” the ministry said.

That statement came after credit rating firm S&P Global said on Wednesday there was a rising risk that Turkey could introduce additional capital controls if the pressure on its currency and financial markets continues to intensify.

free market rules

The Treasury and Finance Ministry stressed prudent fiscal policy would continue in the period ahead and that fiscal discipline would never be compromised.

“Practices that will increase the use and attractiveness of the Turkish lira will be continued without compromising the free market rules,” it.

After that initial statement, the lira firmed as far as 16.8 against the US dollar, before easing to 17.2 by the end of trading. It traded at 17.21 at 0800 GMT on Friday.

The lira has declined 23% this year in addition to last year’s 44% drop in value after a series of central bank rate cuts.

Among other coordinated measures, the Banking Regulation and Supervision Agency (BDDK) said it decided to set a maximum 24-month maturity for consumer loans between TL 50,000 and TL 100,000 and a maximum 12-month maturity for consumer loans over TL 100,000.

It also raised the minimum payment requirements on credit cards in an attempt to slow loan growth. It plans to ease restrictions imposed on foreign investors’ access to the lira via the swap facility.

It said in a statement that, among other steps, it will direct loans toward productive areas such as investment and exports.

Also, the Capital Markets Board (SPK) said it had reduced its fees in order to encourage foreign funding for public offerings held in Turkey and to encourage companies to obtain funds by issuing capital market instruments abroad.

Lastly, the Central Bank of the Republic of Turkey (CBRT) on Friday said banks will maintain additional lira long-term fixed-rate securities for foreign currency deposits/participation funds as a complementary step to increasing the weight of lira fixed-rate securities in the collateral pool that becomes effective on June 24.

“The aim of this regulation is to increase the effectiveness of the monetary policy within the scope of the liraization strategy,” it said.

It also said it was increasing the reserve requirement ratio for lira-denominated commercial cash loans to 20% from 10% earlier in order to support financial stability.

Extra budget mulled

Meanwhile, the Turkish government is reportedly considering pushing a supplementary budget through Parliament before a recess next month in order to cover possible summer payments and the rising costs of a lira decline and soaring inflation.

Two sources told Reuters on Thursday that work on the extra budget was being conducted, but no final decision has been made on whether it will be needed.

Fueled by soaring food and energy prices, Turkey’s annual inflation rate rose at a lower-than-expected pace last month but still jumped to a 24-year high of 73.5%.

The budget burden has grown due to rising energy costs, public sector wage and pension hikes, the lira drop and the related rising cost of a deposit protection scheme (KKM) launched late in 2021 to boost lira deposits by protecting them against depreciation.

“Electricity and gas costs in particular have had an impact (so) it appears impossible to stay within the budget this year,” a senior official said, requesting anonymity. “Making an additional budget seems unavoidable.”

A Treasury source said a supplementary budget was currently not on the agenda.

To ease the burden on households’ budgets, Ankara introduced fuel, electricity and gas subsidies worth TL 200 billion in 2021. They were expected to cost TL 300 billion this year, but energy costs have risen much more than anticipated.

The official said a few meetings have been held but the size of a supplementary budget was unclear, and state institutions are determining their combined additional budget needs.

“The best option would be for it to be pushed through…before the holiday,” he added.

Parliament usually breaks from early July to early October.

“Work has started on issuing an additional budget in this legislative period… (and) a final decision has not been made,” another source familiar with the subject said.

Data suggests the budget deficit was a moderate 2.5% of gross domestic product (GDP) in April-end, but the growing cost burden indicates it will widen by year-end towards 5%, which would bring Turkey closer to the level of other developing markets.

The government also considered a supplementary budget at the end of 2021 but shelved the plan and met rising costs with higher-than-expected revenues.

The government, since the end of December, increased wages and cut taxes to support lower-income households, taking advantage of strong public finances and what was the lowest deficit among peers until 2016.

The budget deficit-to-GDP ratio remained low at around 1% from 2013 to 2016, boosting Turkish investments. It then rose to 1.5% in 2017 and reached 3.5% by 2020.

The KKM deposit protection scheme was worth TL 904 billion last week. While the central bank backs part of the scheme, the Treasury has said its payments to depositors were TL 21.1 billion as of June 3.

The scheme sought to encourage locals to convert their foreign currency savings into lira under a deposit protection plan, compensating depositors for any losses due to lira depreciation.

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