President Recep Tayyip Erdoğan on Monday reiterated the government’s determination to combat rising consumer prices, warning companies of hefty fines if they fail to comply and act contrary to the latest tax cut on staple foods.
Turkey has lowered the value-added tax (VAT) on basic food items – including water, eggs, dairy products, coffee, tea, fruits and vegetables – to 1% from 8% to ease strains from soaring inflation. The decision, announced by Erdoğan on Saturday, went into effect on Monday.
In support of the move, the country’s retailers called for an all-out “fight” against rising food prices, urging all the actors in the supply chain to join the campaign. Some markets in Istanbul were reported on Monday to have started lowering prices to reflect the change.
The authorities tightened inspections as of Monday, a day after Trade Minister Mehmet Muş said the government would act to ensure the VAT cut achieves its purpose.
Muş warned most severe fines would be imposed on businesses that fail to reflect the VAT reduction in prices and “aggrieve” citizens with excessive price increases.
“With the audit teams we have set up, we will apply severe punitive sanctions against those who take the opposite steps against the stance we have taken,” Erdoğan told reporters at Istanbul Atatürk Airport ahead of his trip to the United Arab Emirates (UAE).
The government will create a task force to inspect prices and a mobile app to help citizens find the cheapest goods,Treasury and Finance Minister Nureddin Nebati said Saturday.
Tax cut to lower inflation
Official data for January showed consumer prices rose by 48.69% annually, a 20-year high. Food and nonalcoholic beverages inflation topped 55%. The government has pledged to act and vowed to safeguard households against soaring prices.
The new tax cut should decrease overall inflation by 1.5 percentage points in two months, according to calculations by three economists.
The reduction is expected to trim about TL 25 billion-TL 35 billion ($1.8 billion-$2.6 billion) from Turkey’s budget.
Stressing that the government won’t let inflation “crush our nation,” Erdoğan has called on companies to lower their prices by 7% from Monday to reflect the change. He said basic foods play a significant part in inflation.
Real sector representatives hailed the tax cut and called for the companies in the food business to engage in the campaign to tame rising prices.
The sector’s head organization, the Food Retailers Association, on Sunday expressed hopes the VAT cut would pave the way for an all-out mobilization against inflation.
“We are essentially facing cost inflation,” the association said in a statement. “Therefore, we call on all our business partners, from manufacturer and transporter to supplier and warehouses, to fight food inflation together.”
The annual producer price index (PPI) breached 93% in January, according to official data.
“Aware of the responsibility, we are committed to supporting the cooperation needed to reduce food prices in a sustainable and permanent way together with our business partners while making maximum efforts to reflect VAT reduction on the prices on the shelves,” the association said.
Price cuts
On the other hand, price discounts on products such as eggs, pasta, rice, oil and dairy products have started to be reflected in the country’s metropolis, the chairperson of the Istanbul Retailers Association said.
“This VAT regulation, which applies to basic food products, which are important necessities of our consumers, is quickly being reflected on the shelves,” Faruk Güzeldere told Anadolu Agency (AA).
“As an association, even though it was a Sunday yesterday, we immediately mobilized our employees and immediately reflected this VAT arrangement in our prices.”
The government has embraced a model based on lower borrowing costs, saying credit, exports and investment will help the country weather inflation.
Erdoğan has said the new economic path will also eventually help Turkey solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.
To support the drive, Turkey’s central bank had brought down the key policy rate by 500 points since September to 14% but paused the easing cycle in January. It is expected to keep its one-week repo rate unchanged again this Thursday.
The lira has been broadly stable since the start of the year following a 44% decline in 2021.
It closed last week at 13.49 against the United States dollar. It traded at 13.55 at 4 p.m. local time on Monday.
Prices in Turkey have soared as the country relies on imports for its energy needs as well as raw materials and many food supplies.
In response, the government raised the minimum wage by 50% for 2022. The prices of gas, power, petrol and road tolls also increased to account for import price volatility.
Electricity prices were raised by as much as 125% for high-demand commercial users and by around 50% for lower-demand households at the beginning of January.
Households, shopkeepers, city councils and religious community groups last week complained about the rising energy costs. The government has said it was working on a rearrangement of energy bills and new measures may be announced soon.
“I hope this (price discount in food products) will continue,” said Barış Taşkın, a customer at a local market in Küçükköy neighborhood of Istanbul’s Gaziosmanpaşa district.
“We want the VAT (cut) to be applied on other products as well. Even a small figure is important for our budget. We see that prices are being lowered.”