June 27, 2019 / 9:17 AM / a year ago

Turkey revives plan to tap 46 billion lira in central bank legal reserves: sources

ANKARA (Reuters) - Turkey’s government is reviving plans to transfer the central bank’s 46 billion lira ($8 billion) in legal reserves to its deteriorating budget to shore it up and is also considering adjusting some tax measures as it battles recession, sources said.

FILE PHOTO: A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. REUTERS/Murad Sezer/File Photo

A Treasury official and three other sources familiar with the plans confirmed that the funds - which are separate from the central bank’s foreign exchange reserves - were being eyed to help narrow a budget deficit that has widened by 225% in the first five months of the year.

The Treasury ministry’s proposals were expected to be presented to parliament in a few weeks, after which they could be passed into law, the sources said.

Such a transfer from the central bank would mark the latest unorthodox attempt by President Tayyip Erdogan’s government to pull Turkey out of recession and steady the lira following a currency crisis last year.

Reuters reported in May that the Treasury was working on a plan to transfer some 40 billion lira of the legal reserves, but it was later shelved amid a market backlash including worries about weakening the bank’s ability to respond to another crisis.

The “legal reserves” are what the central bank sets aside from profits by law to be used in extraordinary circumstances.

“The planned regulation amendment for legal reserves was not completely dropped. It was on hold during that time,” said one of the officials with knowledge of the matter. “There is a will that it would be included into a proposed legislation.”

Turkey’s budget recorded a 66.5 billon-lira deficit in the first five months of this year, even after the central bank transferred in some 37 billion lira in profits in January, Treasury and Finance Ministry data showed.

The government predicts an 80.6 billion lira deficit this year, or a 1.8% ratio versus Turkey’s GDP. Economists generally expect the ratio to be more than 3%, though the addition of the legal reserves would lower that by about one percentage point.

MONEY OF LAST RESORT

Last month, economists warned that the planned transfer risked depleting the central bank’s last-ditch defenses while also making the budget more reliant on one-off income boosts.

“This is the money for difficult times. It should not be used to continue faulty policies...This is clearly wrong. Turn back from this mistake,” said Ozgur Demirtas, the finance desk chairman at Sabanci University.

The Reuters story sparked a selloff on May 13. But the lira has strengthened some 5% since then. It stood at 5.7705 per U.S. dollar at 1108 GMT, roughly unchanged from Wednesday’s close.

Erkin Isik, the chief economist at QNB Finansbank, said such a move could set the stage for similar steps in the years ahead as Turkey’s fiscal position becomes less stable.

TAXATION CHANGES

The tax measures under consideration included introducing a new income tax band of around 50% for those earning annual income of more than 1 million lira, three of the sources said. They also included reducing the corporate tax rate to 20% from 22%, they said.

Turkey currently applies up to 35% income tax at the highest income band.

“A possible change in tax levels is still being evaluated, but increasing income tax to around 50% for people with over 1 million lira income is on the table,” a second official said.

The lira lost 30% against the dollar last year and another 10% so far this year in part due to worries about a run-down in the central bank’s net reserves, which are different from legal reserves. At end-2018, the legal reserves stood at 27.6 billion lira, according to the bank’s balance sheet data.

“It is a reality that the budget needs to be supported,” a third official told Reuters.

“The expected transfer of 46 billion lira in legal reserves would in part fix the outlook of the budget. We will see this amount in the budget after the final approval” by Erdogan.

Reporting by Orhan Coskun; Additional reporting by Nevzat Devranoglu and Behiye Selin Taner; Writing by Jonathan Spicer; Editing by Dominic Evans and Toby Chopra

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