Erdoğan’s bitter rain of hikes, search for debt and the IMF scenario

After signing a series of tax hikes over the weekend, President Tayyip Erdoğan is traveling to the United Arab Emirates this week in search of investment and debt. On July 17-18, he will attend the G20 meetings in Gandhinagar, India, where he will be joined by Treasury and Finance Minister Mehmet Şimşek and Central Bank Governor Hafize Gaye Erkan. In the run-up to this trip to seek foreign funding to get out of the economic crisis, Erdogan has not just gave a bitter pill to people to swallow, he literally written a bitter prescription with a severity reminiscent of the IMF prescriptions of the past.

This bitter prescription is being harshly criticized not only by the opposition and the business world, but also by the supporters of the People’s Alliance that elected him as president for the third time on May 28, but for Erdoğan, these criticisms are no longer valid.

Let’s take a closer look at this bitter prescription and whether it will help Erdogan’s search for foreign funding without having to depend on the IMF (along with the UAE opening).

A bitter pill as soon as he’s got the authority

The dark clouds of the expected rain of hikes following the generous election promises actually began to gather when President Tayyip Erdoğan raised VAT rates and fees on July 7. With the July 15 presidential decree, the downpour began.

The President’s July 15 decree increasing the special consumption tax (SCT) on fuel and natural gas led to record increases in gasoline, diesel and Autogas.

Erdoğan used the authority given to him by the parliament in the Omnibus Law that limits the “increase the highest tax amount up to five times” to the maximum extent, and increased the SCT on these items five times. Thus, a litre of gasoline rose from 28 liras to 34 TL and a litre of diesel fuel from 26 liras to 32 TL. It will not be surprising if the increase in fuel and natural gas prices pushes electricity, transportation and food prices even higher in a chain reaction.

I do not see such a possibility at the moment, but, if a stand-by agreement were to be signed with the IMF, the treatment envisaged in the bitter prescription would probably start like this.

Foreign investors and the IMF

The alleged deal with the IMF had been forgotten for some time. It was Seymour Hersh, who brought it to the agenda again.

Hersh claims to have heard from a source on board with US President Joe Biden on the presidential plane Air Force One during the NATO Summit trip, that the president offered Erdoğan 11 to 13 billion US Dollars deal with the IMF in exchange for Sweden’s NATO membership.

First of all, as far as I know, that’s not how things work at the IMF; in other words, the equation of “the US orders and the IMF does it” is not possible in today’s world.

Secondly, I don’t think Erdoğan will sign a deal with the IMF for ideological and political reasons. Instead, Erdoğan will implement a program of his own with almost the same conditions, which is closer to what we experience now.

Third, a loan of “11-13 billion dollars” with binding conditions, as the American journalist claims, is unlikely to solve Türkiye’s problems.

Erdoğan has therefore turned to investors, particularly the UAE, Qatar and Saudi Arabia, in search of the external resources needed to implement his bitter prescription.

Minister Şimsek and three important steps

Foreign investors are happy with Erdoğan’s appointment of Mehmet Şimşek as head of the Treasury and Finance and Hafize Gaye Erkan as governor of the Central Bank, but this satisfaction has not yet translated into confidence to invest in Türkiye. Still, there is an air of “looking at the glass half full” and “giving it time”. There are three reasons for this:

1- After Şimsek’s appointment, harsh interventions in the exchange rate have stopped – although there are interventions from time to time – and the dollar has risen from 21.2 to 26.3 liras within a month. This is not favourable for us, but international capital reads this as “the first step has been taken”.

2- The Central Bank raised the policy rate from 8.5 percent to 15 percent at the first Monetary Policy Committee meeting with its new governor; there are expectations for a further increase. One of my sources said, “The amount is important, of course, but more important is the policy change.”

3- Taxes. The tax hikes, which have deeply shaken the Turkish public, are seen by foreign investors as a “positive” step towards increasing the state’s revenues. If there was an IMF deal, such tax increases would probably be imposed.

Step 4: finding the money

The fourth step is actually the most important: Will Erdoğan be able to find foreign investment or debt? Will he get the expected results from the UAE, Qatar and Saudi Arabia in the first phase? And at what price?

For example, the media claim that Erdoğan’s visit to the UAE will focus more on energy and defence industry. However, the sources I have access to indicate that UAE investors are interested in many other areas. Agriculture, food and pharmaceutical sectors come first. They intend to make Türkiye a production base and a logistics hub in these fields, if they can find conditions favourable to their interests. As for energy, the UAE wants cooperation in renewable energy sources, even as the Erdoğan administration is trying to make free natural gas an additional budgetary cost during the election period.

But it is not only the IMF that uses terms like “macroeconomic stability” and “structural reforms”. The UAE and other Gulf investors use them too; everyone wants to get the gain from what they put in. The steps Erdoğan will take determine the way this will happen: whether through direct investment, acquisitions or the less risky “parking” or “swapping” of money with the Central Bank.

And the November threshold

However, Erdoğan is in a race against time in two respects.

First, he has to find foreign funding by November. There are debt repayments in November – mostly by the private sector. There are also concerns that the impact of summer tourism and agricultural revenues and the impact of salary increases on the cost of living will be lost.

The second is the local elections to be held on March 31, 2024. Erdoğan plans to write the bitter prescription by himself instead of the IMF, to get through November by finding external funding, and to open the purse again for the elections in early 2024. Of course, he will be opening the state’s purse for his political interests, but perhaps he is saying that he will think about that after he wins the elections.

And then there is this. Erdoğan and his cabinet attributed the hikes to “the solidarity of the century after the earthquake of the century” (in the words of Vice President Cevdet Yılmaz) to heal the wounds of the devastating February Kahramanmaraş earthquakes. I have no objection to solidarity, but when you do solidarity through consumption taxes, are you not taking from the rich and the poor equally? The Treasury and Finance Ministry’s statement also includes the justification that “they have not raised taxes since 2016”, which is also difficult to understand; it is as if there is an obligation to raise taxes all the time.

We will have to wait and see.

But these hikes really hurt. They really do.