The Turkish government on Tuesday sought to address debates over a proposed bill designed to raise fees as part of efforts to fund the defense industry, stressing the critical need to boost Türkiye’s deterrence capabilities as conflict rages in its neighborhood.
“Our country has no choice but to increase its deterrent power. There’s war in our region right now. We are in a troubled neighborhood,” Treasury and Finance Minister Mehmet Şimşek said.
The bill, submitted by the ruling Justice and Development Party (AK Party) to Parliament on Friday, is projected to raise about TL 70 billion-TL 80 billion ($2 billion-$2.3 billion) annually for the Defense Industry Support Fund (SSDF), which is used to support and develop the sector.
The legislation comes as Israel’s relentless attacks on Gaza and Lebanon and missile strikes by Iran have raised global concerns that a broader war could erupt in the Middle East.
Under the proposal, companies and individuals would make contributions to the fund based on their tax statements and credit card limits from January 2025. Citizens would also pay a contribution when buying or selling real estate or cars and when making other transactions that require notary approval.
However, the changes concerning credit cards – which envisage an annual contribution fee of TL 750 ($22) for cards with limits set above TL 100,000 – have prompted debates.
It is said to have prompted some consumers to try to lower their credit card limits to avoid the fee, while some bankers said that measure could reduce the number of credit cards in use in Türkiye.
Şimşek acknowledged criticism and debate, adding that the bill was in the hands of Parliament and the ruling party could “re-evaluate” it.
Still, he stressed that increasing deterrence would strengthen Türkiye’s ability to safeguard itself from regional threats.
“The purpose (of the bill) is obvious,” he told an interview with private broadcaster NTV.
“If we increase our deterrent power, then our ability to protect against the fire in the region will increase.”
There are some 126 million credit cards in use in Türkiye, a country of about 85 million people, and some TL 1.25 trillion ($36.48 billion) transactions were made in August, according to Interbank Card Center (BKM) data.
AK Party’s parliamentary group chairman, Abdullah Güler, said when he proposed the bill on Friday that Israel’s next target would be Türkiye, a view often cited by President Recep Tayyip Erdoğan.
“While we are in the middle of all these hot developments geographically, we need to make our defense industry stronger than ever,” Güler said.
Israeli threat
A vocal critic of the Israeli offensive in Gaza and Lebanon, Erdoğan has warned that Israel’s military operations could soon target Türkiye.
Addressing a conference on Tuesday, the president doubled down on the threat posed by Israel.
“Even if there are those who cannot see the danger approaching our country… we see the risk and take all kind of measures,” Erdoğan said.
Şimşek tried to assure the public the bill was designed “solely to fund the defense industry, not to close budget gaps.”
“Every penny from this package will go directly to the Defense Industry Support Fund.”
The draft bill proposes the tax impact of the inflation adjustment for ongoing investments be delayed to increase predictability. The bill would also charge a special consumption tax on non-military drones and on watches that cost more than TL 5,000.
Motorcycles with less than 100 cc and 6KW engine capacity would also be charged a motored vehicle tax under the bill.
Türkiye’s defense industry has enjoyed a boom in recent years, but Şimşek said the sector needed strengthening further.
Defense companies signed contracts in 2023 worth a total of $10.2 billion, according to Haluk Görgün, the head of the Presidency of Defense Industries (SSB).
The top 10 Turkish defense exporters contributed nearly 80% of total export revenue, he said.
Driven by combat drones, defense exports reached a record $5.5 billion in 2023, renewing the peak of $4.4 billion in 2022.
That figure could approach $7 billion by the end of 2024, according to officials.
Official data from the SSB showed that exports surged 9.8% in value in the first eight months of 2024, reaching more than $3.7 billion.
Şimşek highlighted the necessity for investments in high-tech defense projects, including the establishment of an air defense system and the development of fifth-generation fighter jets.
“There are over 1,000 projects in the defense industry, all utilizing advanced technology,” said the minister. “This requires resources,” he added.
“Given the challenging geopolitical environment… we must secure additional funding for defense industry projects.”
Türkiye allocated TL 90 billion from the budget to fund the defense industry last year, he added.
“This year, we increased it to TL 165 billion. Maybe we will need to double this even more.”
Türkiye is currently developing its own next-generation warplane, named Kaan, one of its most ambitious projects to date. The first block of fighter jets is projected to be delivered in 2028.
In August, Türkiye announced plans for the “Steel Dome Project,” an indigenous multilayered air defense system that would feature a network-centric and AI-supported multiplatform-integrated shield across large swaths of land.
That would crown years of investments that have helped Türkiye transform from a nation heavily reliant on equipment from abroad to one where homegrown systems now meet almost all of its defense industry needs.
For years, Ankara has voiced frustrations over its Western allies’ failure to provide adequate defense against missile threats despite Türkiye being a NATO member.
Inflation, fiscal discipline
Meanwhile, Şimşek also addressed other key imbalances, including inflation, which he says will continue to decrease in the coming months.
“Annual inflation peaked in May, but has since fallen by 26 percentage points, and the downward trend will continue,” the minister said.
Tight monetary policy and fiscal measures have helped bring inflation down to 49.38% in September, from a recent peak of 75.45% in May.
The government forecasts it will fall to 41.5% in 2024 and 17.5% next year. The country’s central bank sees it dropping to 38% at the end of this year and 14% in 2025.
Still, Şimşek acknowledged challenges, including services inflation, which he says is not declining as quickly as expected.
“Services inflation is taking longer to respond to our policies. There is an increase of about 120% in rents. There is a similar situation in education. Over time, services inflation will respond more effectively to income policies, and we will break this rigidity in the coming period,” Şimşek noted.
While acknowledging the challenges of curbing inflation, which he says has been a chronic issue for Türkiye for over 50 years, Şimşek stressed that improvements in inflation expectations are being seen.
He expressed confidence that Türkiye will eventually meet its inflation targets, building credibility in the process.
Şimşek reaffirmed the government’s commitment to fiscal discipline and ruled out any reliance on “shock therapy,” instead favoring gradual, sustainable improvements.
Şimşek said Türkiye has met its targets for the current account deficit and the budget.
On foreign investments, he stated there is “significant” interest from Gulf countries, particularly in renewable energy projects.
Türkiye’s net reserves, excluding swaps, have increased by over $100 billion, and balance sheet risks have improved by $200 billion, Şimşek said.
The country has seen $200 billion in improvements in its balance sheet risks.
Şimşek also discussed the country’s credit default swaps (CDS), stating that the risk premium should fall below 200 basis points and that Türkiye is on track to reach this target.
