IMF'ed Up
Economy Issue #17
Welcome back! We hope you’ve had a good week, but we’re sorry to say Yusuf Dikeç has outdone us all once more by filing to patent his now-iconic sharpshooter pose.
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In this week’s edition:
IMF sweet & sour on Turkish inflation
Officials, consumers disagree on inflation outlook
Inflation: Back to school special edition
Small businesses exempt from inflation accounting
This week’s stat round-up
IMF’ed: Şimşek’s policies are good, but are they good enough?
The IMF’s Article IV mission, a special team consulting on macroeconomic stability, released a statement Wednesday about their early-summer meetings in Turkey. The overall message was both sweet and sour.
The sweet: The IMF thinks Şimşek’s policies are working, “sharply reducing crisis risks and raising confidence.” The mission sees inflation dropping both this year and next.
The sour: It’s not dropping fast enough and risks weighing growth down to 2.7 percent in 2025.
The remedy? “A tighter policy mix, focused on fiscal policy” and “a larger and more front-loaded fiscal consolidation.”
In a nutshell, the IMF thinks “crisis risks” have subsided thanks to Şimşek’s policies, but “additional tightening might be called for” if inflation does not stay on course to hit the end-2025 target range.
However, the IMF’s recommendation to adjust wages “according to forward-looking inflation” did not sit well with pundit Mahfi Eğilmez, who asked the obvious question: “But who experienced the past inflation?” Eğilmez pointed out, "Not hiking wages parallel to inflation will only increase social tension.”
As minimum wage talks approach for 2025, a Bloomberg report highlighted the administration is caught between a rock and a hard place: Will the government boost wages to please residents or will they cap wage hikes to curb soaring inflation? The report stated investors and the business sector are hoping for the latter.
Walking a tightrope: Monetary tightness fails to translate for the people
This week, a summary of the August MPC meeting was released, and the message for tightness resounded as strong as ever.
On the other hand, İş Bankası CEO Hakan Aran told Bloomberg rate cuts could start as early as November and the policy interest rate could fall as low as 25 percent in 2025. The Economy Coordination Board was also optimistic about the midterm economic program’s effectiveness in a meeting aimed at solidifying the 2025-2027 program due in early September.
However, general optimism among officials failed to translate to consumer sentiment.
In an August survey of inflation expectations, households’ expectations for inflation 12 months forward rose by 1.1 points to 73.1 percent.
The Central Bank’s former chief economist, Hakan Kara, pointed out the gap between the financial sector’s and the real sector’s expectations was widening. Additionally, a survey by Koç University and KONDA research showed that consumers’ expectations for year-end inflation remained at a soaring 113 percent.
Too cruel for school: Lunch box inflation
In news supporting the grim expectations of households, inflation continued to burn, and parents of school-age children can vouch for that.
This week, main opposition MP Mahir Polat calculated the cost of packing a lunch box has doubled from last year. The cost of the lunch box itself, along with the cheese, fruit and olives inside, rose from 330 liras to 669 liras, stated Polat, noting that schools no longer offer lunches as an alternative.
A recent CB analysis states the climate crisis might be to blame for that, as seasonal changes have disrupted supply and costs. The analysis added that “drought and extreme weather events” have lowered production, pushing prices up.
In further price-gouging news for parents, students’ school service buses will also cost parents more than double this year, according to Milliyet’s exclusive report. The İstanbul Municipality suggested fare hikes of 16 percent, but many bus companies have reportedly bumped rates much higher.
One example in the report put the daily cost of a kid’s roundtrip to school at 333 liras, which is pricier than the cab fare for the same route. As a result, the report said parents are turning to cabs and carpools – the latter of which doesn’t seem like a bad option to us.
The good news for parents is that the İstanbul Municipality transportation committee approved a long-anticipated app-based taxi regulation, which will add 2,500 cabs to the city’s already-busy streets.
However you slice it, most consumers might agree with this statement from the İstanbul Chamber of Industry chairman:
“Unfortunately, the erosion caused by this inflation is now becoming apparent in the ethical and moral rules of the business world and daily life. This inflation is a very different inflation sociologically.”
Accounting for inflation, or inflation accounting
Small businesses seemed to fare better this week in the face of inflation. By the grace of Şimşek, some 1.5m small businesses were exempted from inflation accounting. The practice is an inflation-indexed adjustment of the value of non-monetary assets in the balance sheet, accountant Hüseyin Bakırcı told Economy recap. (Details below in the Fortune TLer section.)
According to Şimşek, small businesses would be exempt from inflation accounting in the second and third tax periods of 2024 if their revenue was below 50m liras at the end of 2023.
Well, isn’t Şimşek just the most understanding … oh, wait … not if you’re an influencer. The Trade Ministry reportedly fined some 16 social media influencers a total of 6.4m liras in the past 18 months for not clearly marking advertisements.
Buy the numbers: This week’s stat and stock round-up
41.8 pct: The annual drop in the trade deficit for July. The deficit shrank from $12.53b in July 2023 to $7.3b.
98.5: The real sector confidence index in August following a 1.8-point drop. A confidence index below 100 signifies a pessimistic outlook.
17 mo: The last time the capacity utilization rate of the manufacturing industry was as low as August’s 75.7 percent.
1.8b liras: Conglomerate Sabancı Holding’s Q2 losses, an improvement from 5.8b liras in Q1.
🔮 Fortune Tler
“[Inflation accounting] is a problem not just for small businesses. This is a practice that creates tax problems for all businesses with assets that are significantly larger than their equities. Say, a company has three properties and their value before adjustment is 10m liras. When indexed for inflation, the new value will be 12m liras. The two-million difference will be considered an adjustment profit. So, if their equity is not a large sum, they will be subject to 500,000 liras in taxes from their assets. They will need to pay that tax, even if they haven’t made any sales or trades in that period.
As for us accountants, we’ve had two different challenges: Our colleagues already face an exhausting workload, so when you count in the added load from this practice, we basically haven’t been able to leave the office. We couldn’t go home all of August, basically. The other challenge is explaining this practice to the taxpayers. Our clients put accountability on us. They can’t fully grasp the issue. There have been arguments and brawls. Businesses already struggling with the current economic conditions face potentially large tax burdens from this practice. This leads to further economic consequences.
It eliminates tax justice. On the one hand, you have companies with strong equity and profitable trade that end up at a loss due to indexing. On the other, you have companies with smaller equities and no trade that end up with a profit and then have to pay taxes.”
– Hüseyin Bakırcı, İstanbul-based accountant
⚡Speed reads
Farmer protests spread across Turkey (Bianet)
What to make of the MEGAP concordat agreement? (Bloomberg Businessweek Turkiye)
Are companies seeking refuge from high interest with concordat agreements? (Ekonomim)
Turkey could become new route for Europe-bound Russian gas (DW)
Goldman Sachs cuts stock price forecasts for Turkish banks (CNBC-e)
Presidential investment officer expects FDI to increase in 2025-2026 (Dunya)
DB holds long position recommendation for lira, despite weakening currency (CNBC-e)
Turkey’s heat map: Air conditioner sales triple from last year (Medyascope)
💰 Earnings and week ahead
Sept 2 Annual, Q2 GDP (TÜİK)
Sept 3 August CPI (TÜİK)
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Turkey recap is produced by the Kolektif Medya Derneği, an İstanbul-based non-profit association founded by our editorial team to support and elevate news media and journalists in Turkey. Contact us: info@turkeyrecap.com
Diego Cupolo, Editor-in-chief @diegocupolo
Gonca Tokyol, Editor-at-large @goncatokyol
Ingrid Woudwijk, KMD president @deingrid
Verda Uyar, Digital growth manager @verdauyar
Emily Johnson, Deputy editor @emilyjohnson
Damla Uğantaş, Tr Türkçe editor @damlaugantas