Turkey triples its petrol tax as Erdogan attempts to fix public finances

Turkey tripled its petrol tax to try to raise funds to pay for the huge giveaways made ahead of the May election, and to fund the $100billion reconstruction costs after the devastating earthquake in February.

According to an announcement published in the official Turkish gazette on Sunday, taxes on petrol have been increased by 200 percent to TL7.53 per litre. Diesel and other petroleum products are also exempted from taxation. According to data from Turkish Petroleum, the increase in taxes on petrol pushed prices up by around 20 percent.

This tax hike is just the latest of a series of measures announced since May 28 by President Recep TAYYIP Erdogan. The value added tax on goods and services was increased in the first week of this month. This is because Erdogan’s economic team promised “rational” policy after years of unconventional policies pushed Turkey’s $900bn ($900bn) economy into crisis.

The rise in fuel and VAT taxes will increase the financial burden on Turks who have already been dealing with high inflation for a long time and seen the lira fall by almost 30% against the US Dollar this year.

As a further sign that Erdogan wants to revitalize the economy, he will travel to Saudi Arabia, Qatar, and the United Arab Emirates this week in order to attract new investment from Gulf nations. The inflation rate fell from 85.5 percent a year to 38.2 percent a yearly in October 2022, but economists are worried that the weaker lira will cause it to rise again.

The tighter fiscal policy is one of the many initiatives that Finance Minister Mehmet Simsek has undertaken since his appointment in June to bring Turkey’s economic growth back on a sustainable track.

Erdogan went on a spending spree in the run-up to May’s elections, distributing a free month of natural gas and raising wages and pensions for public employees. Turkey faces a bill up to $100bn for the reconstruction of a large part of the south which was severely damaged by an earthquake in February.

According to a FactSet survey, economists expect the government’s budget deficit in Turkey to increase to 4.4% of its gross domestic product by this year from only 0.9% in 2022. This highlights the fragility of Turkey’s public finances.

Simsek also wants to cool down the domestic demand which, according to many economists, is too high following years of lax fiscal and monetary policies. Imports have outstripped exports due to the overheated economy, which has pushed the current account deficit up to a new record of $37.7bn for the first five month of this year. Since Turkey is a major energy importer, higher prices may reduce demand for fuel.