The government’s decision to raise the value-added tax by 1% and increase the price of gasoline by about 300,000 liras cannot be viewed in isolation from renewed negotiations with the International Monetary Fund.
This step, which was met with widespread popular objections, goes beyond its direct financial impact, and comes in the context of a clear attempt to readapt the conditions set by the Fund for any potential support program. According to informed economic sources, the tax option was not just a technical detail, but rather a two-fold financial political signal: on the one hand, it contributes to providing quick revenues to the treasury in light of a continuing deficit and deterioration in financing capacity, and on the other hand, it meets one of the basic conditions that the Fund insists on, which is expanding the tax base and enhancing domestic revenues before any external financing.
Economic circles explain that indirect taxes, especially the TVA, are the fastest tool to implement and the most easy to collect in an economy suffering from the growth of the monetary sector and the departure of a large portion of activity from regulatory control.
Therefore, these circles believe that raising it by 1% practically means an increase that includes the various stages of the economic cycle, from import to final consumption.
In the government’s accounts, circles indicate that the taxable volume is supposed to remain sufficient to generate additional revenues that help finance salaries and basic services, even if at a minimum. As for increasing the price of gasoline, it falls within a similar logic, especially since it is able to generate immediate revenues due to the weak elasticity of demand for it in the short term, although its impact is not limited to the treasury, but rather extends quickly to price levels, which increases the possibilities of a new inflationary wave occurring, albeit in varying proportions.
As for the vision of the International Monetary Fund, and the circles follow, the increase in internal revenues is considered an important indicator of the seriousness of reform, because the Fund links any major financing program to concrete steps to reduce the deficit, improve collection, and control spending. Therefore, the recent measures can be considered a proactive step to demonstrate commitment to the terms of the negotiation, at a sensitive stage of the technical and financial talks, knowing that this bet entails risks, most notably the rise in inflation to record levels.
