Turkey has announced an increase in fuel tax as part of its efforts to finance a significant boost to its 2023 budget. The move comes after the country experienced costly earthquakes in February and faced surging spending during the May presidential election. The additional tax on petrol aims to address the budget deficit, which soared to $10bn in the first five months of this year, compared to $4bn during the same period last year. However, the decision may also contribute to inflationary pressures, which have been gradually easing.
The rise in the budget deficit is primarily attributed to increased spending ahead of the May elections, which resulted in president Tayyip Erdogan's re-election for a third term. Additionally, substantial funds were allocated to reconstruction efforts following the devastating earthquakes that claimed the lives of over 50,000 people. The total cost of the earthquakes is estimated to exceed $100bn.
To bolster the Treasury's cash reserves, Turkey has implemented several measures, including the recent tax adjustments on fuel. The tax rate on gasoline has been raised from $0.1 to $0.29, while the tax on diesel oil has increased from $0.078 to $0.27. When combined with value-added tax (VAT), these adjustments are expected to add approximately $0.23 to the final pump price, representing an increase of over 20% a litre, as per Reuters calculations.
The boost of $42.2bn to Turkey's budget was approved by parliament on July 15 and is part of ongoing efforts to bolster government coffers. The government has recently implemented other tax increases, such as a two-percentage-point rise in VAT. These measures aim to address the country's economic challenges as the Turkish lira has experienced significant depreciation, losing over 80% of its value since 2018 and more than 28% in 2023 alone. The weakened currency has led to higher prices for a wide range of imported goods, including fuel and food.
The tax increase on fuel is expected to help Turkey address its stretched budget and fund critical areas, such as earthquake reconstruction and election-related expenses. However, concerns remain regarding the potential impact on inflation, which had shown signs of improvement in recent months.
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