ECONOMY HARNESSED BY REGISTRATION

If curbing inflation was the Yılmaz Government’s number one target, taking the economy under registration was number two, an even a bigger reform. As the deadline for registration is over, the Finance Minister explains the results involving $30 billion addition to the economy. The $4 billion cash received during registration provided transitional breathing space.

Prime Minister Mesut Yılmaz said last May (Issue No:9) that the Government’s two foremost economic objectives were to curb inflation and register the “unregistered economy”. His second target would be an even bigger and long-term economic reform for Turkey than the first, because inflation rates may go up or down and registering the economy provides sound ground for future developments. Hitherto, 50% of Turkey’s economy was unregistered. In other words, the real economic strength of Turkey is twice the size of what the official GDP figures show.

It is nearly six months that the Prime Minister delivered that speech and over two months since the enactment of the relevant bill, the Tax Reform Bill, with provisions to register the economy. The most important provisions of the new tax reform concerned the deadline given to everyone to have their wealth registered by putting their “unregistered money hidden under the mattress” in the bank for at least one day by September 30^th. Whether or not it is “black money”, the Government pledged that it would not ask for an account of its source when the money is deposited in the bank until that date. Once this deadline is over, however, everyone would have to give an account of the source of the money they possessed.

There were long queues in the stock exchange and banks for registering this unregistered money throughout September and the first results of this registration are now known - $30 billion. That is about twice the GNP of Syria.

Finance Minister Zekeriya Temizel told Radikal (9^th) that the biggest registration of unknown wealth was through capital increases of companies or through the foundation of new companies. By September 30^th TL7 quadrillion ($25.45 billion) had entered the system this way. Also, TL1 quadrillion ($4 billion) was deposited in the banks and 31 tons of gold, worth TL83 quadrillion ($301 million), were bought from the Istanbul gold market, the total being $30 billion.

Turkey’s GDP is about $200 billion, but according to the World Bank’s calculations on the basis of PPP (purchasing power parity) it rises to $379.9 billion. (Issue No:10). In other words, the unregistered economy amounts to about $180 billion. Turkey’s economic performance confirms these figures. Now that $30 billion has been registered there is still a sizable amount outside the Government’s control and calculations.

Finance Minister Temizel says that some more of this unregistered money will appear by the end of the year with special provisions in the Tax Reform Bill. Certainly, September 30^th was a historic milestone in the Turkish economy in curbing the unregistered economy. Another important deadline is October 30^th by which time businessmen and companies are free to declare the unregistered goods in their inventories. After that date, excessive goods in inventories will be treated as illegal black money. This date is also bound to bring forth further unregistered wealth. There are similar provisions in the Tax Bill about registration of unknown wealth through land registration and other means.

$4 billion unregistered money was a temporary relief for the economy

The $4 billion that entered the economy in recent weeks due to the registration deadline did not make much impact on economic life because they were unreliable short-term deposits. Banks did not include them in their calculations and transactions with the fear that they may quit before long, but the first few weeks did not justify their fears and the money stayed on. Foreign exchange deposits in banks rose by $2.5 billion in 2½ months, from $25,792 million on June 12^th to $27,606 million on September 18^th. It may well reach $30 billion before long.

Still, short-term or not, this sum of $4 billion was a considerable relief for the economy in the last few weeks. It slowed down the decline in foreign exchange reserves due to the exodus of foreign capital from Turkey because of the global crisis. It also helped easing the hardships of the liquidity shortage in the market.

The most prominent impact of this money was that it facilitated foreign exchange borrowing transactions among banks. The interest rates in these transactions had risen to 17-19%. It dropped to 12% on September 30^th, the deadline for registering undeclared money. This interest rate now sails at 14-15%.

The newly declared $4 billion increased the Central Bank’s foreign exchange deposits only by $300 million. On October 2^nd the Central Bank’s reserves were $22,020 million. The net foreign exchange position on the same day was $4,631 million, compared to $4,830 million a day before. It is today about $4.55 billion.

Another impact of the deadline was to prevent the rise of the liquidity shortage in the market. It was TL750-800 trillion in mid-September and TL800-850 trillion at the end of the month. On October 8^th it rose to TL944 trillion. Now that the short breathing space provided by the deadline is over the decline in foreign exchange reserves is expected. Also, economists believe that the liquidity shortage may surpass TL1 trillion before long.

Tax number for every Turkish national

An important instrument for taking the unregistered economy under control is a tax number allocated to all Turkish nationals from birth. This long-standing practice of western free market economies will be another important factor to raise Turkey’s tax revenue and to enhance its economic performance within western standards.

As from January 1^st, 1999 no banking or financial transactions of more than TL10 million will be possible without a tax number, but this figure is not final yet. It may be increased to reduce red tape. The Director-General of Public Revenue, Nevzat Saygılıoğlu, said on October 8^th that not all financial transactions would be subject to a tax number requirement. Even in the United States they could only monitor interest payment movements, he said.

Zekeriya Temizel said that in 1998 the Government paid from the Budget more than TL6.5 quadrillion for debt interest payments as against TL1 quadrillion allotted to public sector investments. The debt interest repayment would reach TL9 quadrillion in the 1999 Budget and would soar to unbearable limits in the year 2000. When the Finance Ministry was under such a heavy debt-servicing burden it was not possible to accord bigger facilities to a productive economy. They had given all the incentives they could afford in the Tax Bill for this purpose, he said.

“It is exceedingly normal,” said the Finance Minister, ”for the Government to borrow if it can transform it into investments and get fresh revenue from it. But if you are using borrowed money for meeting current expenses and paying civil servants’ salaries it means than you are walking up a blind alley. Turkey has gone into such a blind alley. The new Tax Bill may help us get out of it.”

Finance Ministry circles believe that about a quarter of the unregistered economy has been taken under control with the new tax legislation and this rate may improve further in the following months. They are preparing to wage a fight against the remaining money that has chosen the illegal path. uras@ada.net.tr, October 10^th, 1998