Roaring oil prices threaten Turkish disinflation program
Crude oil prices that have reached 10-year high recently are threatening to disrupt Turkey's disinflation plans, analysts said last weekend.
The surge in global oil prices has had a minimal effect on Turkish inflation so far thanks to a shock-absorbing mechanism the government introduced early in the year, they said.
But the mechanism, which changed an ad-valorem tax on oil to a fixed nominal tax, could not be sustained if oil prices stay high despite against the output hike agreed by the Organization of Petroleum Exporting Countries (OPEC) in Vienna on Sunday.
The mechanism was launched in February to help the disinflation program, and it enables the Cabinet to intercede with oil taxes in order to avoid the direct impact of price volatility on consumers.
But the practice has cost around TL 600 trillion in foregone tax revenue because the government had assumed an average oil price of $23 per barrel at the start of the program, while so far it has averaged $27.5 this year. Visiting International Monetary Fund (IMF) chief Carlo Cottarelli reportedly warned the government to abandon the mechanism in order to protect public finances.
But if it does follow the IMF's suggestion, the government will have to compromise on disinflation at a time when inflation is already deviating from the year-end targets. "That wouldn't look pretty because these types of programs aren't exactly popular with the public," said an analyst who wished to remain anonymous.
The practice could have boosted tax revenues if oil prices remained low, since then the nominal tax wouldn't change, but the government was not that lucky. Oil prices retreated only slightly from $34.50 per barrel last week although a production hike at Sunday's meeting was almost certain.
The market was unlikely to be satisfied by a 700,000 barrel per day output hike. If the government waits any longer it may have to raise oil prices more drastically. They will have to increase taxes sooner or later anyhow in order to increase budget revenues, analysts said.
"But we would muddle through September if the output hike causes a temporary dip in oil prices," one commented.
Analysts said that high oil prices have also been hurting State Economic
Enterprises (SEEs) in the energy sector, whose financing shortages put an
additional burden on the budget.
Oil prices also hurt external balances. The impact of oil prices on Turkey's current account deficit is projected to amount to somewhere between $1.5-2 billion by the end of the year. "Each $1 increase in the price of oil per barrel means $180 million on external accounts, assuming that Turkey will import 180 million barrels of oil this year," said an analyst who spoke on condition of anonymity.
Oil prices averaged $17-18 last year and may average $29 by the end of the
year, although a fall is projected next year," he added.
A leading culprit behind the deteriorating current account balance, Turkey's oil
import bill has grown by twice this year when compared to 1998, which was also
a year of economic growth. In the first half of this year Turkey imported $1.9
billion of crude oil, compared to $1 billion in the same period of 1998 when the
average price was $18-19 per barrel. –(Albawaba-MEBG)
© 2000 Mena Report (www.menareport.com)