Turkey Cuts FX Purchase Tax in a New Step to Normalization

(Bloomberg) -- Turkey cut a tax on foreign-currency purchases, its latest step to ease market restrictions that hurt investor sentiment and failed to curb the lira’s decline.

The tax on retail purchases of foreign currency, including gold, has been reduced to 0.2% from 1%, according to a presidential decree published in the country’s official gazette on Wednesday. The levy was reintroduced in 2019 to increase budget revenue and was raised earlier this year amid the Covid-19 pandemic.

The government also cut the withholding tax on new or renewed lira deposit accounts for the rest of this year, a move aimed at encouraging savings in the domestic currency.

Wednesday’s decrees add to measures unwinding a slew of trading restrictions on the currency, which raised investor concerns that the government was assuming a bigger role in managing the market. The Turkish lira has weakened 12% in the second half to successive record lows against the U.S. dollar, making it the worst-performing emerging-market currency tracked by Bloomberg.

The lira gained as much as 0.6% and was trading 0.5% higher at 7.7705 per U.S. dollar as of 2:09 p.m. in Istanbul. The currency slid to a record low of 7.8568 per dollar on Tuesday. The Borsa Istanbul 100 Index was also up 1.1%.

The foreign-currency holdings of local residents stand at $218.1 billion, near a record high, according to the central bank data.

“One needs to take these measures holistically,” said Cristian Maggio, head of emerging-market strategy at TD Securities in London. “The Turkish central bank and government have failed in their attempt to control the lira via unorthodox measures and restrictions. They are rolling a lot of them back now.”

Last week, the central bank unexpectedly hiked its one-week repo rate by 200 basis points to 10.25%, while the banking regulator increased swap limits on lira trading for banks. Those measures were followed by a reduction in the regulator’s asset-ratio formula, which was introduced earlier this year to boost lending.

The average daily trading volume in the local foreign-exchange spot market was $4.18 billion in August, according to central bank data. That’s about 45% less than the 2018 average, when the government started tightening restrictions after the currency crisis.

Though the lira’s reaction showed traders welcome the moves, Maggio said they shouldn’t automatically be interpreted “as a white flag to unconventional measures and the return to a path of orthodoxy.”

“The central bank and the government have so dented their reputation in the market that it will take more than doing just the right thing,” he said.

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