The foreign exchange rate monster in the economic amnesty package
The government submitted an omnibus stimulus package to the parliament that goes well beyond expectations. Everything is included: eid bonuses for retirees, tax restructuring, fine restructuring and amnesties, insurance premium restructuring, university fee amnesties and zoning amnesties. Almost every households will benefit from the populist measures.
According to calculations by government officials, the package will cost TRY 24 billion, but experts say the costs will likely be higher. The TRY 2000 eid bonuses alone will cost TRY 24 billion. When you factor in amnesties for fines, the cost will surpass government estimates.
In addition, the state’s contribution to every child that attends kindergarten will be raised from TRY 304 to TRY 1015 while the VAT ratio for residences will be lowered. That will be a huge burden on the budget. The estimated budget deficit for 2018 is TRY 65.92 billion of which the TRY 24 billion amounts to 36 percent.
The government argues that this cost will be offset by the payment of receivables. But this is not realistic. It is not clear how much public participation there will be in the restructuring. Those who enter the program will pay their installments over two months spread over many years in which case it’s likely the positive contributions from the restructuring will remain far below its costs.
Clearly, the purpose of this amnesty package is to influence voters. However, even before voters could understand the implications of the package, let alone reap its benefits, they were hit by the lira’s decline to 4.30 to the dollar.
It’s no coincidence that the foreign exchange rate has soared. Policies to accelerate growth before the elections have increased the vulnerabilities of the economy, putting single digit inflation out of reach. The IMF issued a report emphasizing these vulnerabilities while credit rating agencies have been lowering their ratings for Turkey.
So instead of relief, the package appears to be leading to more hardship. Neither the reassuring statements of the Deputy Prime Minister responsible for the economy nor the Central Bank’s decision to squeeze liquidity has calmed down the market.
Everything shows that the economy is in a critical state.