The Turkish government on Tuesday signaled it could boost wages as of July, in an effort to safeguard households from soaring inflation.
Fueled by soaring food and energy prices, Turkey’s annual inflation rate rose at a lower-than-expected pace last month but still jumped to a 24-year high of 73.5%.
However, Turkey’s public finances are strong compared to emerging market peers, leaving it room for potential stimulus. Having said that, mindful of the need for additional spending for the upcoming elections, the government presented a TL1.3 trillion supplemental budget to the parliament.
“Turkey is in a position to implement an arrangement that will satisfy all employees in July,” Labor and Social Security Minister Vedat Bilgin told an event in the capital Ankara.
“It is our duty to protect employees against inflation. We will not allow employees to be crushed by inflation. We have a July period ahead of us,” he added.
President Recep Tayyip Erdoğan on Monday first signaled the government could announce a relief as of next month.
“We increased the minimum wage by close to 200% over the past 20 years. We will provide relief to all sections of our nation in July,” Erdoğan said.
He said Turkey would be relieved of the burden caused by inflation and will leave behind its problems from February-March next year, postponing his estimate of the economic recovery from summer months to next year.
The budget burden has grown due to rising energy costs, public sector wage and pension hikes, the lira drop and the related rising cost of the deposit protection scheme (KKM) launched late in 2021 to boost lira deposits by protecting them against depreciation.
To ease the burden on households’ budgets, Ankara introduced fuel, electricity and gas subsidies worth TL 200 billion in 2021. They were expected to cost TL 300 billion this year, but energy costs have risen much more than anticipated.
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Data suggests the budget deficit was a moderate 2.5% of gross domestic product (GDP) in April-end, but the growing cost burden indicates it will widen by year-end toward 5%, which would bring Turkey closer to the level of other developing markets.
The government also considered a supplementary budget at the end of 2021 but shelved the plan and met rising costs with higher-than-expected revenues.
Since the end of December, the government boosted wages and cut taxes to support lower-income households, taking advantage of strong public finances and what was the lowest deficit among peers until 2016.
New wage and pension hikes coupled by a vigorous tourism season, as well as run-away credit growth (annualized growth reaching 60% per annum) is expected to boost economic activity in summer months. The downside is fiscal stimulus is almost certain to add to pressures on prices and current account deficit.
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