FT: Turkey triples petrol taxes as Erdoğan tries to repair public finances

Measure prompts concerns over higher inflation after increases in value added tax.

Turkey has tripled petrol taxes as the government tries to raise money to recoup the cost of huge giveaways ahead of May’s election and fund reconstruction costing up to $100bn after February’s devastating earthquake.

Taxes on regular petrol were increased about 200 per cent to TL7.53 a litre, with levies on diesel and a series of other petroleum products lifted as well, according to an announcement on Sunday in Turkey’s official gazette.

The increase pushed up petrol prices at the pump by about 20 per cent, data from state oil company Turkish Petroleum showed.  The tax increase is the latest in a string of measures announced by President Recep Tayyip Erdoğan since his re-election on May 28. Value added taxes on a wide variety of goods and services were increased earlier this month as Erdoğan’s new economic team has pledged “rational” policies, after years of unconventional measures pushed Turkey’s $900bn economy into crisis.

The VAT and fuel tax rises will add to the financial burden for Turks, who have dealt with a prolonged period of high inflation and have watched the lira depreciate almost 30 per cent against the US dollar this year alone.

In a sign of how Erdoğan is seeking to revive the economy, the president will also travel this week to Saudi Arabia, Qatar and the United Arab Emirates as he looks to attract fresh investment from Gulf countries.

Inflation fell to 38.2 per cent a year in June from its October 2022 peak of 85.5 per cent a year, but economists worry the weak lira and the new taxes will send it back up.

Tighter fiscal policy is part of a multipronged effort by finance minister Mehmet Şimşek, who was appointed in June, to pull Turkey’s economy back on to a sustainable path. Erdoğan launched a big spending spree ahead of May’s election, giving away a month of free natural gas and increasing public sector wages and pensions. Turkey is also facing a bill of up to $100bn to rebuild a large area in the south that was badly damaged by February’s earthquake.

Economists expect Turkey’s government budget deficit to jump to 4.4 per cent of gross domestic product this year, from just 0.9 per cent in 2022, according to a FactSet poll, underscoring the fragility of public finances.  Şimşek is also seeking to cool domestic demand, which many economists say is far too high after years of loose fiscal and monetary policy. The overheating economy has caused imports to far outstrip exports, pushing the current account deficit to a record $37.7bn in the first five months of this year. Higher prices could cool demand for fuel and hence reduce imports, since Turkey is a big energy importer.