Turkey’s record budget deficit signals financial troubles for 2022
Turkey’s government posted a budget deficit of 145.7 billion liras ($10.9 billion) for December after sharp losses for the lira forced it into covering a 59 billion lira import bill for natural gas company Botaş.
The record deficit more than tripled from December 2020, according to Treasury and Finance Ministry figures published on Monday. That increased the budget gap for the whole of 2021 to 192.2 billion liras.
Turkey’s economy has been shaken by a slump in the value of the lira, leading to surging import costs, and a spike in inflation, which reached 36.1 percent last month, the highest level since 2002. The lira lost 44 percent of its value in 2021 in a repeat of a currency crisis seen in 2018.
The renewed troubles for Turkey’s fragile economy signal more financial pain for the government, businesses, and consumers this year.
In the wake of the currency crisis three years ago, President Recep Tayyip Erdoğan’s government quickly began missing its budget goals, boosting spending and implementing tax cuts designed to protect the economy from recession. At the same time, companies made fewer profits, leading to a decline in corporate tax revenue.
By September 2019, the budget deficit of 85.8 billion liras had exceeded the government’s goals for the whole year. The target was missed despite the central bank distributing tens of billions of liras of its profits earlier than planned. By the end of 2019, the deficit had surged to 123.7 billion liras, 80 percent higher than a year earlier.
Turkey has set a budget deficit target this year of 278 billion liras, with spending of 1.75 trillion liras and revenue of 1.47 trillion liras.
Higher oil and natural gas prices are likely to pressure government finances further in 2022 - the country imports nearly all of the energy that it consumes. The surge in inflation - JPMorgan expects consumer prices to peak at around 55 percent in May – is set to increase costs for businesses and consumers, crimping sales and corporate tax revenue.
In December, surging inflation and the slump in the lira’s value prompted Erdoğan to announce a 50 percent increase in the national minimum wage. He also eradicated the tax burden for the country’s lowest wage earners. This month, Erdoğan said that the government could hike public sector pay for the second time this year should inflation remain elevated by the summer.
The government has also promised more financial help for industry. It is set to announce an increase in Treasury loan guarantees under the national Credit Guarantee Fund (KGF), which bailed out companies following the currency crisis of 2018. The KGF has provided 516 billion liras in collateral guarantees since its inception in 1994, according to its website, with nearly all that amount approved since 2018.
Erdoğan’s government is facing pressure from companies to lower sales taxes on goods such as basic food stuffs. It has already moved to reduce the tax burden for consumers buying cars of smaller engine capacities after a decline in sales. The president has also promised more support for farmers, who say they are suffering increasing economic hardship. The government provides billions of dollars in agricultural subsidies to the sector each year.
Financial help for the government may be forthcoming in February. The central bank is bringing forward its annual general assembly meeting for 2022 to Feb. 3 to decide on distributing its profits for last year.
The central bank made a profit of 60 billion liras in 2021 after registering unexplained income of 130 billion liras on Dec. 31. The Treasury and Finance Ministry owns around 55 percent of the central bank’s share capital and is the sole owner of preferential ‘Class A’ shares.
The central bank also brought forward its annual meetings in 2019 and 2020, at which it approved the distribution of around 34 billion liras and 40 billion liras in profit, respectively. The government used its share to cover increased budget spending.