(FinancialTime.com) - In an effort to stem losses on its financial markets Turkey is to drop the 15 per cent withholding tax that it imposed on foreign investors in January.
The move brings Turkey into line with European Union rules for taxation of individuals, Kemal Unakitan, finance minister, said.
Under the proposals, which are expected to sail through parliament, the withholding tax on income and dividends from financial instruments held by non-residents would drop to zero, while the rates applied to Turkish residents would be cut from 15 to 10 per cent. Ankara will retain the 15 per cent withholding tax on deposits and repos held by domestic investors, and the tax exemption for derivative instruments will stay, reports Trend.
The Istanbul bourse has fallen more than 20 per cent and the lira fallen about 20 per cent since foreign investors began pulling out of riskier emerging markets last month. That experience brought to mind the crippling financial crisis in Turkey in 2001, but the economy, especially the banking sector, has been restructured significantly since then.
"This is certainly a step in the right direction, but not enough to stop the sell-off," said Mahmut Kaya, head of research at Garanti Securities in Istanbul. "It is a very important step forward to erase the tax," Durmus Yilmaz, central bank governor told a London conference. "I believe this will help foreigners come back."
Turkey's economic fundamentals were strong, despite problems with its current account deficit. Mr Yilmaz also acknowledged another factor in economic confidence was Turkey's EU negotiations, and the possibility they could be slowed or halted by a looming dispute with Cyprus. "The road to the EU will be bumpy . . . Therefore we have to manage it."
Mr Unakitan stressed the government's commitment to strict fiscal discipline, citing as "one of the most significant indications" the fact it had met 63 per cent of its primary budget surplus target in the first five months of 2006. Deficit social security spending would be limited to 4.5 per cent of gross national product and a 4 per cent inflation target maintained in 2007 and 2008.
Earlier this month the central bank held an extraordinary meeting of its monetary policy committee and raise rates by 175 basis points, the first rate increase since the crisis of 2001.
Mr Kaya said Turkey's economic transformation had stood on three legs: a favourable global environment, domestic political stability, and loans from the International Monetary Fund coupled with the likelihood of EU accession. Now the global environment had turned, Ankara had to address investor concern about next year's presidential poll, and do its utmost to keep EU accession on track.