Turkey hikes tax on lira deposits to lift revenue, curb dollar use

Turkey has raised the withholding tax on short-term Turkish lira deposits and investment funds by 2.5 percentage points, a move economists said was aimed at boosting budget revenues and curbing dollarisation.

For deposit accounts with a maturity of up to six months, the rate was increased to 17.5 per cent from 15 per cent, a decree published in the Official Gazette on Wednesday showed, while for those with a maturity of up to one year, it was raised to 15 per cent from 12 per cent.

“Budget revenues are not increasing. Interest payments and non-interest expenditures — especially interest payments — reach 100 per cent. Revenues need to increase. The way to do this is through withholding tax,” ALB Yatirim Chief Economist Filiz Eryılmaz said.

She also noted that recent outflows from money market funds have been accompanied by strong inflows into free foreign exchange funds, creating increased foreign exchange demand.

Eryılmaz highlighted that the second goal is also to reduce dollarization.

After interest rates rose, withholding tax on money market funds was kept at zero percent for a long time. “Now that the rate has been raised to 17.5 per cent, the aim is to prevent investor outflows,” she said.

Eryılmaz said larger interest rate cuts from the central bank should now no longer be expected. “After this, we expect a 250 basis point cut in July. The possibility of a 350 basis point cut has significantly diminished,” she added.

The central bank will announce its July interest rate decision on July 24.

Rising interest in FX funds may be curbed slightly by the new withholding tax, but dollarization will persist due to ongoing political uncertainty, said Marbaş Menkul Degerler analyst Mustafa Kemal Eski.

He said the move likely aims to support the government’s medium-term fiscal target, noting that 67 per cent of the goal has been met so far, with half of the year still ahead.