What’s going on here?
The IMF praised Turkey’s mid-2023 economic policy overhaul, noting its efforts to tame inflation and mitigate crisis risks have started to pay off.
What does this mean?
Turkey’s economic strategy took a sharp turn last summer, with the country hiking interest rates from 8.5% to 50% and implementing some fiscal tightening measures. These stern steps have reduced the current account deficit, rebuilt reserves, and fostered better market sentiment. While these moves have curbed the risk of a financial crisis, they’ve also balanced out some of the economic growth. The IMF’s latest report projects Turkey’s economy will grow by 3.4% this year, down from previous highs, and forecasts inflation to fall to around 43% by year-end. By 2025, growth is expected to moderate to 2.7%, with inflation dropping further to approximately 24%.
Why should I care?
For markets: Confidence on the rise.
Turkey’s aggressive policy shifts have renewed confidence among investors, reducing immediate financial risks. While the high-interest rates come at a short-term cost to growth, they help stabilize the economy, making Turkey a more attractive option for cautious investors. Market sentiment has improved as the country rebuilds its reserves and narrows its current account deficit, signaling a healthier economic outlook.
The bigger picture: Balancing act in motion.
The IMF’s recommendations highlight Turkey’s delicate balancing act. While a gradual approach to reducing inflation aims to minimize the hit to economic growth, it carries risks of future shocks, like potential spikes in energy prices. The IMF suggests that a more aggressive fiscal consolidation could bring inflation down faster and more sustainably, albeit at the expense of growth in the short term. The strategy’s success hinges on managing these trade-offs effectively.
