Statement from Prof. Dr. Şişman on credit card restrictions

The Central Bank of the Republic of Turkey (TCMB), which continues to pursue a comprehensive tight monetary policy to combat high inflation, is set to continue taking steps that include restrictions on credit card usage to regulate the credit market in response to interest rate hikes.

TCMB Governor Fatih Karahan stated in the latest inflation report that the increase in credit card spending is being monitored and that there is a need for new measures in this regard.

As incomes are eroded by high inflation in Turkey, basic needs are increasingly being met through credit cards.

INDIVIDUAL DEBT EXCEEDS 2.7 TRILLION LIRA

According to the Banking Regulation and Supervision Agency (BDDK) data from December 2023, the total amount of individual debt, consisting of housing, vehicle, consumer loans, and credit card debt, has reached 2.7 trillion lira. While the total increase in individual debt compared to the same period of the previous year reached 80 percent, credit card debt has grown by approximately 2.7 times.

Installment card spending accounted for approximately 43 percent of individual credit card spending, totaling 507 billion lira. Individual installment credit card spending was approximately 220 billion lira at the end of 2022. This indicates a 2.3-fold increase in one year, showing that consumers are turning to installment spending due to the duration of the rise in inflation.

TCMB inflation forecasts suggest that annual inflation will reach the 70-75 percent band by mid-year before ending 2024 at the 36 percent level.

Will credit tightening alone be enough to control inflation?

Speaking to DW Turkish, Consumer Union President Lawyer Mehmet Bülent Deniz stated that the credit card debt stock rose in December 2023, noting, "There is only one sign of this. Consumers have started to meet their most essential needs with credit cards because the cash in their pockets is not enough. In fact, a study we conducted this year revealed that credit cards are now even being used in neighborhood markets."

Deniz emphasizes that the economic management's current framework of curbing consumption and implementing tightening policies, including new restrictions on credit cards, will directly affect purchasing power.

LIVING LIMITS OF USERS ARE CRITICAL

Deniz provides information suggesting that those who pay only the minimum amount on their credit card statements are exhausting their savings. Stating that they are conducting public opinion research on this issue, Deniz says, "Even in social segments we call white-collar workers, only the minimum amounts are being paid, and debt is accumulating."

With a decision taken on July 31, 2023, the Banking Regulation and Supervision Agency (BDDK) removed the credit card installment option for airline, travel agency, and overseas accommodation expenses.

According to previous restrictions, while installments were removed for cosmetics, installments of up to 9 months for home appliances, 4 months for electronic goods, 12 months for computers, and 6 months for tablets are still permitted.

Minister of Treasury and Finance Mehmet Şimşek also signaled in September that steps would be taken to curb credit in credit cards, individual loans, vehicle loans, and second-home loans.

"RESTRICTIONS WILL NEGATIVELY AFFECT THE MARKET"

Economist Prof. Dr. Mehmet Şişman points out that even mandatory expenses in Turkey are being covered by credit cards, saying, "Now they want to pull this down as well. However, if they want to stop inflation by suppressing demand, this is not a sound path. It is not something that will solve the problem structurally."

Emphasizing that consumers are turning to credit card spending and installment purchases to cope with inflation, Şişman points out that since restrictions on installments have already been introduced, further restrictions will negatively affect the market.

"60 percent of tax revenues are met through indirect taxes. New restrictions will pull indirect taxes downward. This creates a danger for the budget," says Şişman, continuing as follows:

"There are ways to combat inflation other than reducing total demand. There are interruptions that have been disrupted. There are cost-related problems. There are legal and institutional problems preventing the breaking of inflation expectations. There are questions about whether this economic management will continue after the elections. Restricting by cutting is not the right path."

Pointing out that it seems difficult for the Central Bank to pull inflation down to 36 percent by the end of the year with its current policy, Şişman emphasizes that reducing the consumption of segments that are already deteriorating could lead to new crises such as a 'risk of sudden stop in the economy' and could also increase informal borrowing.

"THE WAY TO BREAK EXPECTATIONS IS TO RESTORE THE RULE OF LAW"

Professor Şişman states that information regarding uncertainties after the election is also circulating, saying, "What does the consumer do then? They say, 'The price of everything might increase, inflation might rise, so let me buy the things I need, let me buy the furniture, let me buy the refrigerator.' You cannot break inflation without breaking the purchasing behavior." Pointing out that the ways to break expectations are clear, Şişman adds, "These are restoring the rule of law and respecting institutions. Giving assurances that the Central Bank management will continue and putting fiscal policy into effect."

Stating that it is difficult to lower inflation while income inequality is widening, Şişman suggests that in addition to tightening monetary policy, steps should be planned such as implementing income-based financial policies, reducing public spending, and reducing wealth accumulation and high corporate profit margins to 30 percent levels.

"THE NUMBER OF PEOPLE FALLING INTO LEGAL FOLLOW-UP WILL INCREASE"

Mehmet Bülent Deniz is of the opinion that new restrictions on credit cards will increase the number of people who will be subject to legal follow-up.

According to 2023 results from the BDDK, non-performing loans and credit cards reached 45 billion lira, with credit card debt in legal follow-up reaching 15.5 billion lira, an increase of approximately 51 percent compared to the previous year.

According to the Banks Association of Turkey (TBB) systems, the number of people who entered legal follow-up due to individual loan or individual credit card debt in the January-November 2023 period reached 1.2 million. Approximately 768,000 of these consist of people who only failed to pay their credit card debt. As of November 2023, the number of people who have not paid their individual loan or credit card debts and are continuing from previous periods exceeds 3 million 830 thousand.

"TRANSFORMED INTO A LIFELINE FOR THE WAGE-EARNING CLASS"

Mehmet Bülent Deniz, who also thinks that credit card interest rates will increase after the election, says, "This is a development that will directly and negatively affect credit card interest rates. Of course, theoretically, a credit card is a payment instrument, not a credit instrument. But due to the situation the Turkish economy is in, the credit card has turned into a lifeline for the wage-earning class and has become a tool for using credit. We hope that, apart from non-essential products like electronic goods, new legal difficulties regarding installment divisions, splitting minimum payments, or limit increases will not be introduced."

Predicting that inflation will rise according to the transition table this year, Deniz adds, "Because the Central Bank Governor's latest presentation clearly indicated that the economy will not recover until 2026. We were saying that a difficult year is growing for the consumer. Developments show this as well."