The Turkish government has enacted drastic tax measures to curb car imports as it scrambles to ease a foreign exchange crunch. The move aims to encourage the sale of locally produced vehicles, but its impact remains questionable in a country where demand for imported cars has been traditionally high.

An ongoing flight of foreign capital, coupled with a sharp decline in hard currency revenues from exports and tourism during the coronavirus pandemic, have brought Turkey’s current account deficit to some $30 billion, with Ankara losing control of foreign exchange prices despite costly efforts to keep them in check. The price of the dollar shot up more than 7% in a mere month, hitting the region of 7.35 liras in mid-August. 

The demand for foreign exchange has been driven mainly by importers, entities indebted in hard currency and savers who see foreign exchange as a safe haven to preserve the value of their money. 

The government had already introduced a series of measures to suppress imports. In its latest move Aug. 30, it announced big hikes in the special consumption tax levied on automobiles in a bid to curb the importation of cars. The tax hikes translate to price increases of 13% to 20% on imported and bigger engine-capacity cars. The changes were touted as a move to protect domestic production, with the prices of locally manufactured cars expected to decrease by 3% to 6% in the short run. Though Turkey has become a net exporter in the automotive sector, demand has remained high for imported cars, for which the country pays something between $10 billion and $12 billion per year.