Turkey to Cut VAT on Staple Foods in Bid to Tame Inflation

Turkey to Cut VAT on Staple Foods in Bid to Tame Inflation

(Bloomberg) —

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Turkey will reduce value-added tax on staple foods to 1% from 8% in an effort to bring down inflation, President Recep Tayyip Erdogan said.

Erdogan called on companies to lower their prices from Monday to reflect the change, in a virtual appearance at a finance ministry press conference on new economic support packages.

The government will also create a task force to inspect prices and a mobile app to help citizens find the cheapest goods, Finance Minister Nureddin Nebati said at the event.

The lira has slumped and inflation surged as Turkey’s central bank, urged on by Erdogan, slashed interest rates by 500 basis points in four consecutive meetings from September. In January, the annual inflation rate accelerated to 48.7%, the highest level since Erdogan took power two decades ago.

Boosting Lira Center Stage as Turkey Central Bank Reviews Policy

Nebati also detailed a new Credit Guarantee Fund package with the government acting as a guarantor, up to 60 billion liras ($4.45 billion), meaning that amount banks will be giving out will be many times more.

The government offers new loans for middle- to high-technology firms at an interest rate up to 16%. That’s quite cheap as Bloomberg estimates show that weighted average interest rate for commercial bank loans as of Feb. 2 is 22.7%.

The government will monitor use of the funds to make sure they finance production and exports, in response to complaints that companies previously used such credit packages to buy dollars.

Nebati urged Turks to bring their “under-the-pillow” gold savings — an estimated 5,000 tons — into the banking system.

“This is equivalent to $250 billion-$350 billion. Some of this will support the central bank and meet the needs for foreign exchange,” he said after meeting investors in London last week.

(Adds details to the Credit Guarantee Fund plan in the fifth and sixth graphs.)

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