Depreciation of Turkish Lira impacts national economy

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s it walks the political tightrope of war between two of its strongest neighbours, Turkey is looking to avoid a slump in economic growth by positioning itself as the investment hotspot of Europe, offering low-cost labour and raw materials. The pandemic set back this strategy considerably -according to the Central Bank of Turkey’s balance of payments data, Turkey attracted a total of USD 5.67 billion of foreign direct investment (FDI) in 2020, almost USD 200 million down from USD 5.87 billion in 2019. This figure is the lowest FDI figure for Turkey in the last 16 years. However, that figure increased by 48% in 2021, to reach USD 14.1 billion. Historically, the services sector, especially finance and insurance, have taken the highest share of FDI inflows to Turkey. The sectors that received the most investment in 2021 were wholesale and retail trade, information and communications technology (ICT) and automotive.

While Turkey tries to attract inward investment, it is endevouring to use its weakened currency to boost the export market.

"In December 2021, a New Economy Model was announced, aiming to benefit from the weakening of the Turkish lira," says Jbid Kucuksivazliyan, supervisor of international tax and transfer pricing services for BDO Turkey. "According to this model, which is based on 'export-led growth', the weakening of the Turkish lira will increase exports, decrease imports as imported goods will become expensive, and the current account balance will be maintained. In accordance with the low interest policy, which is another pillar of the model, interest rates will be lowered and thus investments will increase, leading to economic growth and employment."

In order to increase exports and foreign investment, Turkey has made a number of changes to tax laws. For instance, an additional advantage was provided for the portion covered by cash brought from abroad in the application of interest reduction in cash capital increase. According to the regulation, the 50% discount rate will be applied as 75% for foreign-sourced capital. It has also reduced the profit distribution withdrawal rate from 15% to 10% for dividends distributed by resident corporations to non-resident corporations or non-residents who are exempt from corporate tax.

After high increases in foreign currency rates in the last quarter of 2021, Turkish economy managers took some actions to minimise the risks. The most important action was the granted advantages for those who turned their foreign exchange deposits to Turkish Lira deposits. According to the regulation, if gold and foreign exchange deposits’ interest revenues are less than the increase in foreign currency in the same period, Turkish Treasury will guarantee and pay these differences to the deposit owners. Also, the differences of exchange rate of deposits changed from foreign currency to Turkish Lira and interest revenues were subjected to tax exemption.

While the Turkish government is working hard to encourage FDI, inflation and staffing issues are putting the squeeze on accountancy firms in the short term, especially the smaller players.

"In the early years of the Republic, due to the lack of capital, the private sector was so small that the economy was run by the state," says Özgür Demirdöven, CEO at MED Group, an Allinial Global member firm. "Although it has been 33 years since the adoption of the Law of Accounting Profession on June 1, 1989, the problems of professional members have not been solved, and new problems are being added every day. Payment and unfair competition are the leading problems in this sector. All stakeholders should do their part in solving these problems, but they should also learn how to extract unique opportunities from each problem. Staffing is another major issue in the country, as it is in the rest of the world. It is difficult to find qualified or promising young talents. Even if you can find them, it is very hard to keep them. Because of that, employee costs have increased significantly in the last couple of years, also due to hyperinflation and devaluation in the country. "

Kucuksivazliyan points out that it is hard to attract graduates in the first place. "Young people are not choosing accounting as a profession," he says. "Professional accountants complain about high workloads, that they do not have enough spare time for their private lives, and low wages that do not correspond to their efforts and this is putting students off."

"There is a constant discussion on this issue to find ways to attract the younger generation to this profession," says Hakan Sahin, audit partner at IŞIK Yeminli Mali Müşavirlik ve Bağımsız Denetim A.Ş, member of BKR International. "There are too many updates and new legislations in tax and audit fields, requiring high level of patience and life-time learning, which prolongs the learning and experience period for a new employee in the profession."

This is creating a difficult environment for the smaller firms – while fixed costs are rising, there is pressure to keep fees at the same rate. "Sole practitioners are having a hard time, especially during the last three years," says Demirdöven. "They are either going out of the market or transferring their clients to firms they know well. I assume this will increase in the upcoming term due to harsh market conditions such as increased fixed costs due to hyperinflation, staffing and retention, collection, and succession planning issues."

"The unexpected increase in price pressures has been one of the most important problems in the global economy," says İlker Eke, senior auditor at MGI Worldwide member firm, MGI Bağımsız Denetim A.Ş. "The drawback of the Lira's volatility is that it becomes hard to estimate cost and profit margin, which makes it hard to agree on fees that satisfy both parties.

Inflation, coupled with the war in Ukraine, is driving the country into crisis. After the lira lost half its value last year, the country is now struggling with rocketing inflation at 61.14%. The independent economic research group Enag, which monitors Turkey’s inflation rate using the same metrics as the government, calculates real inflation was 142.63% in March, which means the economy is now facing hyperinflation.

Confidence is key for foreign investment – while Turkey's political scene may have stabilised, its dependence on Russian and Ukrainian tourism and Ukrainian wheat is knocking that confidence. Coupled with numerous changes of management at the Central Bank (Turkey has had four central bank chiefs in the last three years), Turkey has a hard case to argue for FDI cash.

While its economic strategy has drawn criticism from economic experts, Turkey has tried to handle the opportunities and risks caused by its strategic geographical location in a balanced way, according to Veysel Ekmen, chairman of Vizyon, an MGI Worldwide member firm.

"For the last couple of years, Turkey, like the rest of the global economy, suffered from the negative effects of the pandemic," he says. "But it also benefited from the weakness of supply chain as a result of its strong production infrastructure, open economy and geopolitical location. Now, war between Russian and Ukraine has become a significant risk factor for the Turkish economy. Turkey is in a difficult position as it has strategic trade relations between both sides of the war. The diplomatic pace followed by Turkey has its own characteristics to ensure peace and minimise its potential risks."

Despite the difficult environment, there are opportunities for firms looking for growth. According to Ekmen, e-commerce and financial technologies have become much more important in Turkey.

"E-commerce is one of the service sectors we see growing day by day," he says. "There has also been a big increase in a demand for services from the financial technologies industry. Electronic money companies and more traditional businesses exploring digital banking and practices are driving demand for accountancy services, while the software and game industry are emerging as strong sectors for growth."

Ekmen is also expecting progress in the near future for a Turkish carbon trade system and carbon taxes. The voluntary carbon market relates to transactions in carbon credits that fall outside of compliance schemes. Demand for carbon credits in this market is driven largely by companies that pursue voluntary decarbonisation strategies. The international voluntary market has rebounded in recent years, with transacted volumes doubling since 2017. In 2019, over 100 million tonnes were transacted, with the market value exceeding USD 300 million. Turkey has attracted low-carbon investments by acting as one of the world’s leading host countries under the voluntary carbon market. Turkey is the third-largest host country in terms of number of registered projects (288 as of Q4 2020) and represents the largest seller of voluntary carbon credits in the region, according to the European Bank for Reconstruction and Development.

Alongside emerging markets, increased globalisation as a result of economic and technological developments is changing business structures. According to Demirdöven, the importance of risk management is increasing. "We are seeing an increasing demand for client accounting and advisory services in the market," he says. "And with hyperinflation, corporations are seeking to increase the effectiveness of their operations. Because of that we see a growing demand for data analytics."

Technology is dramatically changing the way accountancy firms do business and if they want to keep up with the market, they are going to need to invest heavily in skilled staff and an up-to-date infrastructure.

"Technology trends are coming together to change the way we share information and experiences and access products and services," says Demirdöven. "Trends currently influencing accounting include cloud, big data, data analytics digital service delivery, payment systems, cybersecurity, robotics, augmented and virtual reality, artificial intelligence, and GRC. All of these affect the professional environment, working style, and abilities of accountants. They open new models of work, allowing accountants to automate time-consuming and repetitive tasks and apply their skills to focus on higher-value work. It is impossible to predict the future with any degree of certainty. However, accountants must develop their skills and abilities in this direction by learning about emerging technologies and following technological developments that minimise burdens and maximise benefits. To overcome challenges and leverage opportunities created by new and emerging technologies, accountants need to use analytical and problem-solving skills to assess potential impact. Then, they can provide the financial information needed to guide any tactical and strategic business decision. The human factor will never become insignificant in the accounting business. People come up with ideas and create businesses from those ideas. Technology may change, but the dynamics of business processes will remain the same. "

BRUSSELS, BELGIUM. 24th March 2022. Recep Tayyip Erdogan, President of Turkey, during press conference, after NATO Extraordinary Summit.