IMF Staff Concludes Staff Visit to Türkiye

IMF News, October 6, 2023

Source details

Growth remained resilient despite the February earthquakes and "should reach 4.0 percent this year."
Growth is projected at "3¼ percent in 2024."
Inflation is forecast to fall to "46 percent at end-2024 from 69 percent at end-2023."
Sequential inflation is expected to decline in 2024 as exchange rate pressures ease, though "backward-looking wage increases and expectations remain."

The demand for gold is expected to decline as confidence builds, reducing the external current account deficit: "3.1 percent of GDP in 2024 versus 4.1 in 2023."
Better prospects for inflows, including from official sources, are expected to reduce pressure on reserves.
Gross reserves reached "$122.5 billion at end-September," but "net of on- and off-balance sheet short-term liabilities remain negative."

The authorities raised the policy rate from "8.5 to 30 percent"; combined with quantitative measures, this has "significantly tightened financial conditions."
IMF staff recommendation: prioritize disinflation by "bringing the ex-ante real policy rate into contractionary territory."
Further policy rate increases are recommended to durably reduce inflation, accompanied by "lower reliance on quantitative measures to increase the role of price signals in money and credit markets."
The IMF views the CBRT commitment to allow the lira to float as "commendable" and advises FX intervention be "limited to situations of severe market dysfunction."
Financial liberalization should continue at a carefully calibrated pace; immediate beneficial measures include "removing lending rate caps" and other steps that improve monetary transmission and allow more risk-based loan pricing.
Some unwinding (e.g., certain liraization and FX-protected deposit targets) should proceed more cautiously and wait "until the real policy rate has moved past the neutral level."

Fiscal policy turned expansionary in 2023 due to "Earthquake-related spending, large wage hikes, and various subsidies."
The 2023 general government deficit is "projected at 5½ percent of GDP, despite the appropriate recent tax increases."
To support disinflation, the 2024 budget deficit "should be below the Medium-Term Plan forecast."
Policy recommendations to tighten the underlying fiscal stance while allowing reconstruction and protecting the vulnerable:
- Eliminate above-inflation compensation increases.
- Introduce forward-looking, rather than backward-looking, pension and wage settings.
- Replace blanket energy subsidies with targeted assistance.
- Pursue other options to tighten the underlying fiscal stance while financing earthquake reconstruction and protecting the most vulnerable.

The balance of risks is "to the downside."
Domestic downside risk: the policy shift "loses its strong momentum, eroding confidence and leading to increased FX demand and reserve drain."
External downside risks: "higher commodity prices, a slowdown in trading partners’ demand, and global systemic financial instability."
Upside scenarios: "unexpected sources of external financing could materialize," or full investor confidence recovery could create "a virtuous cycle of inflows and a stronger exchange rate" that reduces inflation faster and boosts growth.

Real sector (Percent)

Fiscal sector (Percent of GDP)

Nonfinancial public sector overall balance: 2022: "-2.1"; 2023: "-6.0"; 2024 Proj.: "-5.5"
General government overall balance (headline) 1/: 2022: "-1.3"; 2023: "-5.4"; 2024 Proj.: "-5.1"
General government gross debt (EU definition): 2022: "29.4"; 2023: "34.0"; 2024 Proj.: "34.5"

External sector

IMF staff statement, Press Release No. 23/343