Finance minister Simsek unveils new tax package, economic strategies

In a recent televised interview, Treasury and Finance Minister Mehmet Simsek provided crucial insights into the country’s economic strategies and reforms. Simsek discussed a wide range of topics, including Türkiye’s exit from the grey list, tax reforms, currency stabilization and efforts to combat inflation.

He emphasized the importance of collective effort and strategic planning in achieving these goals.

Can you explain your ‘We did it’ post regarding Türkiye’s removal from the FATF grey list?

“Before boarding the plane, I had to make a post, but the official announcement would come later. We were there at the meeting, which was closed to the public, and no one raised any objections. So, we decided to make a brief post. We should be proud,” the minister said.

How did Türkiye manage to exit the grey list, and what are the implications?

To this question, the minister answered that Türkiye was removed from the grey list by unanimous decision.

“Not a single country objected. Many representatives expressed strong support for us before the meeting. Exiting the grey list was a collaborative effort involving the Ministry of Finance, Ministry of Justice, and Ministry of Interior,” he added.

“Turkish Financial Crimes Investigation Board (MASAK) played a significant role in the technical process. The exit enhances Türkiye’s financial credibility and could accelerate capital inflow, although excessive foreign exchange inflows need careful management to avoid destabilizing the Turkish lira and inflation.”

“We will continue to strengthen our administrative and technical capacities, particularly of MASAK. We live in a risky region, and everyone might try to exploit our system. We will continue with a risk-focused model and leverage artificial intelligence in this regard,” Simsek maintained.

Will removal from grey list accelerate capital inflows to country?

“It might. However, it’s important to note that capital inflows are already very strong. When there is an excess of foreign currency entering the system, we have to purchase it, which means printing Turkish lira. This additional liquidity can threaten the disinflation process, so we must withdraw this liquidity back,” the finance minister said.

He further added that since the end of March, the Central Bank’s reserves have increased by nearly $78 billion, a historic figure in Türkiye’s financial history.

“A significant portion of this is from local companies and citizens choosing the Turkish lira, some from medium- and long-term external sources, and some from short-term external sources. As of now, our reserves are nearing the desired level according to IMF standards. As of last week, gross reserves have reached around $147-148 billion, a historical record,” he noted.

How Türkiye’s economy program being received internationally?

Maintaining that interest in Türkiye’s economy program is growing, the minister said: “You will see the money currently seen as hot money will shift to long-term instruments. By this time next year, hopefully, inflation will have dropped below 30%. We expect a significant increase in long-term, permanent funds flowing into Türkiye.”

“We have established three-year programs with banks such as the World Bank, the Asian Infrastructure Investment Bank, and the Islamic Development Bank. Through these programs, we aim to bring over $60 billion in long-term and very low-cost resources to our country within the next three years, including this year. This is not hot money; it will change form,” he added.

What are the key points of Türkiye’s new tax package?

Finance Minister Mehmet Simsek emphasized that the government’s preference is to tax currently untaxed areas rather than imposing new tax burdens on citizens. The focus is on broadening the tax base, reducing tax evasion, and ensuring fairness in the tax system. Finance Minister Simsek outlines the new tax package as follows:

• Multinational corporations operating in Türkiye will face a minimum corporate tax rate of 15%
• Türkiye-based companies will need to adhere to minimum corporate and income tax requirements outlined in the draft plan
• There are no plans to tax tips or motor couriers, despite sectoral demands.
• Departure fees for international travel may increase, with proceeds potentially directed toward earthquake-prone areas if deemed suitable. However, students traveling abroad will be exempt from these taxes.

What is the current status of Türkiye’s foreign reserves, and what has been achieved recently?

“Since the end of March, Türkiye’s net reserves have increased to approximately $78 billion, reaching a historic high. The gross reserves now stand at $148 billion. The reduction of domestic bank swaps has also significantly improved Türkiye’s net reserve position, currently at around $12 billion,” the minister said.

What measures are being taken to address the current account deficit?

Saying that the current account deficit has significantly improved, dropping from $57 billion in May last year to an expected $26 billion, the minister said: “The government aims to maintain the deficit below 2.5% of GDP to reduce external debt and facilitate reserve accumulation. A new industrial policy is being introduced to ensure the deficit remains low.”

How is Türkiye addressing budget deficits and ensuring fiscal stability?

The minister said that the budget deficit, which was projected to be around 10% last year, was managed down to 5%. “This year, the goal is to reduce it further below 5% and eventually below 3%. Measures include tackling populist policies’ impacts, improving tax collection, and reducing expenditures. The government’s focus is on balancing the budget and maintaining fiscal discipline,” he added.

How is Türkiye handling inflation, and when will citizens feel the improvements?

Simsek said that the government expects inflation to decrease significantly, with the market predicting it to fall to 31.8% over the next 12 months and to 20% within 24 months. “By year-end, inflation could drop to around 42%. Monthly inflation rates are expected to decline steadily, improving purchasing power and reducing the rapid erosion of real incomes,” he added.

When will the first decrease in inflation be observed?

Maintaining that the first decrease in inflation will be seen in June, the minister said that a significant drop will occur in July, August, and September. “By October, inflation will fall to the 40% range, possibly even in September. When the September inflation figures are announced on Oct. 3, we might see the 40% figures,” he added.

How will inflation reduction affect wages, particularly the minimum wage?

Answering this question, the finance minister said: “Our goal is to reduce inflation to around 40% by the end of this year, down from 75%. Monthly inflation rates will drop to around 2% and then 1%, leading to an increase in real wages. The minimum wage in dollar terms has seen significant increases during the Justice and Development Party (AK Party) governments. From an average of $227 during 2000-2010 to $339 during 2003-2023, and reaching $524 as of June 2024.”

“This year, real minimum wage will increase, with a 49% rise in January, and inflation expected to be around 43-44% by year-end. This will result in higher real wage increases compared to inflation. The same applies to pensions and civil servants’ salaries,” he added.

How does Türkiye’s minimum wage compare to other developing countries?

Compared to developing countries in Asia, Latin America and Eastern Europe, Türkiye’s minimum wage is higher, the finance minister said.

“In Europe, only Poland surpasses us among developing countries. Despite the challenges, we have consistently increased the minimum wage above economic growth rates, ensuring higher living standards,” he added.

Is it possible for you to receive double salary from public service?

“No, it’s not possible for me to receive a double salary or hold another position elsewhere. I see this public service as a mandatory military service, which I undertake out of love for my country. I am making a significant personal sacrifice, both financially and emotionally,” the minister noted.

What is the stance on increasing VAT and addressing price hikes in rents?

Responding to this question, the minister said: “There are no plans to increase VAT this year. The government is focusing on fighting inflation without introducing new taxes that would exacerbate the issue. Regarding rent prices, especially in major cities, the government sees no reason for further increases this year following the impact of the earthquake.”

How is the government ensuring fair growth distribution and protecting low-income citizens?

“The government has taken steps to ensure fair growth distribution by exempting minimum wage from taxes and planning for inflation-adjusted wage increases. The aim is to prevent low-income earners from being disproportionately affected by inflation. The government also provides significant tax support for essential sectors like agriculture and education,” the minister answered.

What future tax policy changes can businesses and individuals expect?

Shedding light on the future tax policy, the finance minister said: “Future tax policy changes include introducing minimum corporate taxes for multinational companies and improving the taxation of currently untaxed areas like crypto assets and certain investment incomes. The government will also increase penalties for tax evasion and enhance the use of technology in tax audits to ensure compliance and fairness.”

How does the government plan to support sustainable economic growth and employment?

Simsek highlighted that in the last 20 years, an average of 690,000 jobs have been created annually for citizens, coinciding with the decrease in inflation.

“Sustainable economic growth and employment are being supported through fiscal policies aimed at reducing the budget deficit and current account deficit. The government is committed to maintaining a stable exchange rate and promoting long-term economic stability, which includes measures to boost industrial output and investment in key sectors,” he added.

What is the current state of Türkiye’s reserves?

“Last year in May, our 12-month current account deficit was $57 billion. This May, it will likely drop to $26 billion. We are performing much better than expected in reducing the current account deficit. Last May, the deficit was about 6% of gross domestic product (GDP), and we expect to reduce it to around 2% by the end of the year,” the minister said, adding that the government achieved significant success in addressing the current account deficit.

“We will implement a new industrial policy with active state involvement to maintain the current account deficit at these levels. If we can keep the deficit below 2.5% of GDP, we will achieve two major benefits: a downward trend in the external debt-to-GDP ratio and the ability to accumulate reserves permanently,” he added.

Currently, our reserve accumulation is largely due to the portfolio preferences of companies and citizens. We aim to make this more permanent and have removed the reserve issue from being a concern, Simsek underscored.

What is the financial impact of the EYT (Early Retirement Scheme) and what is the budget balance?

The finance minister highlighted that the annual cost of the EYT, including financing costs, is ₺724 billion, nearly 2% of gross domestic product (GDP). Last year, without intervention, the budget deficit was expected to be around 10%. “However, we closed the year at around 5%, a significant improvement,” he added.

What are the recent changes in the KKM (Currency Protected Deposit) Scheme

“At its peak last year, the KKM reached nearly $144 billion. It has now dropped below $63 billion, and the decline is expected to accelerate. For 44 consecutive weeks, there has been a decrease in KKM,” the minister said, adding that this scheme was a factor hindering monetary policy effectiveness and the disinflation process.

“As of today, companies no longer have tax advantages in the KKM. If companies earn interest from KKM, they are now subject to regular corporate tax with no exemptions. For individuals, we have introduced taxes on interest earnings this year, including those from KKM, which will accelerate the exit from KKM,” the finance minister concluded.