ANKARA: Turkey’s government is reviving plans to transfer the central bank’s 46 billion lira ($8 billion) in legal reserves to its deteriorating budget to shore it up and is also considering adjusting some tax measures as it battles recession, sources said.
A Treasury official and three other sources familiar with the plans confirmed that the funds — which are separate from the central bank’s foreign exchange reserves — were being eyed to help narrow a budget deficit that has widened by 225 percent in the first five months of the year.
The Treasury Ministry’s proposals were expected to be presented to Parliament in a few weeks, after which they could be passed into law, the sources said.
Such a transfer from the central bank would mark the latest unorthodox attempt by President Tayyip Erdogan’s government to pull Turkey out of recession and steady the lira following a currency crisis last year.
Reuters reported in May that the Treasury was working on a plan to transfer some 40 billion lira of the legal reserves, but it was later shelved amid a market backlash including worries about weakening the bank’s ability to respond to another crisis.
The “legal reserves” are what the central bank sets aside from profits by law to be used in extraordinary circumstances.
“The planned regulation amendment for legal reserves was not completely dropped. It was on hold during that time,” said one of the officials with knowledge of the matter. “There is a will that it would be included into a proposed legislation.”
This is the money for difficult times. It should not be used to continue faulty policies. This is clearly wrong.
Ozgur Demirtas , finance desk chairman at Sabanci University
Turkey’s budget recorded a 66.5 billon lira deficit in the first five months of this year, even after the central bank transferred in some 37 billion lira in profits in January, Treasury and Finance Ministry data showed.
The government predicts an 80.6 billion lira deficit this year, or a 1.8 percent ratio versus Turkey’s GDP. Economists generally expect the ratio to be more than 3 percent, though the addition of the legal reserves would lower that by about one percentage point.
Last month, economists warned that the planned transfer risked depleting the central bank’s last-ditch defenses while also making the budget more reliant on one-off income boosts.
“This is the money for difficult times. It should not be used to continue faulty policies. This is clearly wrong. Turn back from this mistake,” said Ozgur Demirtas, the finance desk chairman at Sabanci University.
The Reuters story sparked a selloff on May 13. But the lira has strengthened about 5 percent since then.
Erkin Isik, chief economist at QNB Finansbank, said such a move could set the stage for similar steps in the years ahead as Turkey’s fiscal position becomes less stable.
The tax measures under consideration included introducing a new income tax band of about 50 percent for those earning annual income of more than 1 million lira, three of the sources said. They also included reducing the corporate tax rate to 20 percent from 22 percent, they said. Turkey currently applies up to 35 percent income tax at the highest income band.
“A possible change in tax levels is still being evaluated, but increasing income tax to around 50 percent for people with over 1 million lira income is on the table,” a second official said.
The lira lost 30 percent against the dollar last year and another 10 percent so far this year in part due to worries about a run-down in the central bank’s net reserves, which are different from legal reserves. At end of 2018, the legal reserves stood at 27.6 billion lira, according to the bank’s data.
“It is a reality that the budget needs to be supported,” a third official said.
“The expected transfer of 46 billion lira in legal reserves would in part fix the outlook of the budget. We will see this amount in the budget after the final approval” by Erdogan.
