Turkey slashes VAT on basic foods as inflation spirals

By News Desk

Istanbul: Turkish President Recep Tayyip Erdogan on Saturday slashed sales tax on dairy products, fruit, vegetables and other basic food items from 8 percent to 1 percent as inflation surges to a near 20-year high.

The rising cost of living has become a major source of public discontent in Turkey, where it is expected to feature prominently in next year´s presidential election.

Inflation hit 48.69 percent in January, the highest level since Erdogan´s Islamic-rooted party stormed to power two decades ago.

Erdogan said the fall in VAT would apply to a host of products, including cooking oil and dried fruit.

"All these reductions will help in our fight against inflation," he said.

Protests are planned across Turkey this weekend over falling purchasing power.

Last month, Erdogan changed the head of the state statistics agency Tuik for the fourth time since 2019.

Turkish media reported that he was unhappy with the inflation figures it published.

The opposition and some economists believe that the official figures grossly underestimate the reality.

Analysts said Turkey's annual inflation is fuelled by President Erdogan's push for unorthodox interest rate cuts and a resulting crash in the currency late last year.

The lira weakened 44% last year as the central bank slashed interest rates by 500 basis points since September to 14 percent, under Erdogan's drive to prioritise credit and exports.

Partly in response to the currency turmoil, the government raised administered prices this year including for gas, electricity, road tolls and bus fares, while the monthly minimum wage was hiked 50 percent.

Transport-related prices soared 68.9 percent year-on-year, while food and drinks prices jumped 55.6 percent, driving inflation to its highest level in Erdogan's nearly two decades in power.

The combination of inflation and currency depreciation has rattled the big emerging market economy, upended household and corporate budgets, and deepened poverty ahead of elections scheduled for mid-2023.

Inflation should surpass 50 percent this month and plateau around 55 percent for most of 2022 before ending the year at 33 percent, Goldman Sachs said.

In an interview with Japan's Nikkei, Finance Minister Nureddin Nebati predicted inflation will remain below 50 percent and peak in April.

Meanwhile, ratings agency Fitch downgraded Turkey's sovereign debt rating to "B+" from "BB-" saying the government's policies have increased risks from high inflation and weak foreign currency liquidity.

"Policy-driven financial stress episodes of higher frequency and intensity have increased Turkey's vulnerabilities in terms of high inflation, low external liquidity and weak policy credibility ", Fitch said in a statement. The ratings agency maintained the middle-eastern nation's outlook at "negative".