Inflation in Türkiye is expected to fall to around 24% next year, the International Monetary Fund (IMF) said in a report released on Wednesday, highlighting that easing in the headline inflation figures began in the summer.
“A turnaround in economic policies since mid-2023 tightened Türkiye’s overall policy mix, sharply reducing crisis risks and raising confidence,” the organization said.
“In the medium term, a further drop in inflation would boost confidence, and growth would rise toward a potential of 3.5%-4%,” the IMF said in its 2024 Article IV Mission.
The financial agency said headline inflation in Türkiye started easing this summer, but it still remains high, adding: “Despite favorable base effects, still-strong inertia would keep inflation at around 43% at end-December.”
“Under the authorities’ announced policies, IMF staff expect both GDP (gross domestic product) growth and inflation to decline this and next year,” it also said.
Since June last year, Turkish authorities pivoted a major turnaround in the economic policy, most notably by hiking the key policy rate by a total of 4,150 basis points to rein in soaring inflation while also seeking to reduce the country’s current account deficit and boost reserves.
While the shift in the policy was widely welcomed by markets, a longer period of the tight policy is known to result in subduing the demand, thus affecting consumption and growth.
“Tight monetary and income policies will weigh on domestic demand, bringing 2024 growth to around 3.4%,” the IMF said.
The Turkish economy expanded by 5.7% in the first quarter of the year, marking one of the world’s highest rates, although the economic activity is widely expected to moderate after a series of interest rate hikes. The statistical office is due to announce second-quarter GDP data next week.
Reducing inflation
Moreover, the IMF said in its report that “a tighter policy mix focused on fiscal policy would reduce risks and bring inflation down more quickly and sustainably.”
It added that a larger, more front-loaded fiscal consolidation is needed to help reduce inflation.
“Taken together and front-loaded to the extent possible, measures amounting to around 2.5% of GDP would better calibrate the fiscal impulse over 2024-2025 to support the disinflation effort,” it said.
“Türkiye’s public debt is sustainable. The authorities’ medium-term deficit target of 3% provides appropriate fiscal space to address contingent risks from public-private partnerships and state-owned enterprises.”
The agency said tight financial conditions will be needed until sequential inflation “is firmly on a downward path and inflation expectations converge to the central bank’s forecast range.”
Türkiye’s annual inflation rate was at 61.78% in July, slowing from 71.60% in June and down from 75.45% in May.
The IMF said the Central Bank of the Republic of Tükiye (CBRT) “should continue smoothing temporary exchange rate volatility while avoiding undue real appreciation, and replenish reserves buffers opportunistically” until sequential inflation is on a sustainable downward trend.
“As inflation falls and reserve buffers improve, intervention can be scaled back and allow the exchange rate to act as a shock absorber,” it added.
It was advised that intervention against persistent shocks should be avoided.
Meanwhile, Türkiye’s current account deficit declined to 2.7% of GDP in the first quarter of this year and would continue to fall to around 2.2% of GDP, according to the IMF.
While Türkiye’s international reserves, net of swaps and other liabilities, increased by $91 billion since April, international credit agencies upgraded the country’s sovereign risk rating and CDS spreads have declined nearly 440 basis points since mid-2023, it added.
The IMF also said Türkiye’s removal from the Financial Action Task Force (FATF) “gray list” in June was welcomed.
The agency added that strengthening policy frameworks, addressing barriers to small and medium enterprises (SMEs), improving labor market functioning and speeding the green transition would boost economic growth in the medium term.
