The International Monetary Fund confirmed that the shift in economic policies in Turkey since mid-2023 has significantly reduced crisis risks.
This came in a statement issued by Chief Economist James Walsh after virtual meetings held with the Turkish side on August 19 and 20.
The statement stated that Turkey’s current account deficit decreased to 2.7 percent of GDP in the first quarter of this year.
It added that market sensitivity has improved and foreign exchange reserves have increased by $91 billion since last April after deducting foreign exchange swaps and other obligations.
It pointed out that international credit rating agencies have raised Turkey’s credit rating, and that the credit default swap (CDS) for the Turkish economy has decreased by about 440 basis points since mid-2023.
The statement indicated that headline inflation began to decline during the summer months but remains high.
It also explained that the financial and institutional sectors have been able to overcome the tightening policy so far.
The statement added: “According to the policies announced by officials, IMF staff expect both GDP growth and inflation to decline this year and next.”
It pointed out that tight monetary and income policies will lead to weak domestic demand, which will reduce economic growth to about 3.4 percent in 2024, with inflation expected to reach 43 percent by the end of the year.
Fiscal policy is expected to become contractionary and real interest rates will remain positive in 2025, which will lead to a decline in growth to 2.7 percent and inflation to about 24 percent, according to the statement.
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It explained that recording a further decline in inflation in the medium term will enhance confidence and positively reflect on growth to return to the level of 3.5 – 4 percent.
It pointed out that export growth will keep the current deficit at about 2 percent, and that international reserves will remain above 100 percent of the IMF’s reserve adequacy standard.
The statement noted that the authorities’ gradual approach to combating inflation aims to reduce its impact on growth, but may carry downside risks.
The statement indicated that further fiscal consolidation is needed to help curb inflation.
It said, “A tighter policy mix focused on fiscal policy will reduce risks and reduce inflation more quickly and sustainably.”
It pointed out that the tight monetary policy stance will need to be maintained until headline inflation and its expectations fall within the expected range of the Central Bank of Turkey.
The statement stressed that maintaining financial stability requires continued attention and further reforms, and that macroprudential policies should focus on reducing systemic risks.
The statement welcomed Turkey’s removal from the Financial Action Task Force’s “grey list” last June.
The Financial Action Task Force is an intergovernmental organization based in Paris, France, founded in 1989.
The group works to set international standards to combat money laundering, the financing of terrorism and the proliferation of weapons, and it also evaluates the extent to which countries adhere to those standards.
