Turkiye: 2024 Article IV Mission Press Release

IMF News, August 28, 2024

Source details

IMF mission led by Mr. James P. Walsh visited Türkiye during May 29 – June 11, 2024, with virtual follow-up discussions during August 19 – 20, 2024.
End-of-Mission press release conveying preliminary findings; staff will prepare a report for the IMF’s Executive Board subject to management approval.

A turnaround in economic policies since mid-2023 tightened Türkiye’s overall policy mix, sharply reducing crisis risks and raising confidence.
External and market developments:
- Current account deficit fell to 2.7 percent of GDP in 2024:Q1.
- International reserves (net of swaps and other liabilities) increased by US$91 billion since April.
- Credit rating upgrades by international agencies and CDS spreads have declined nearly 440 bp since mid-2023.
Inflation and financial sector:
- Headline inflation has started easing in the summer, but remains high.
- Financial and corporate sectors have so far weathered liberalization and policy tightening without visible stress.

2024:
- GDP growth: around 3.4 percent.
- Inflation (y/y) at end-December: around 43 percent.
- Current account deficit: around 2.2 percent of GDP.
2025:
- GDP growth: 2.7 percent.
- Inflation: around 24 percent.
Medium term:
- Growth expected to rise back toward potential of 3.5-4 percent.
- Current account deficit: around 2 percent.
- International reserves: would stay above 100 percent of the IMF’s reserve adequacy metric.

Downside risks from a gradual disinflation approach:
- Prolonged exposure to shocks that could derail disinflation, including higher global energy prices, geopolitical tensions (conflict in the middle east or the war in Ukraine), or a reversal of capital flows.
- Slower growth may increase credit risks; FX borrowing and carry trade flows create FX liquidity risks.
Upside scenario:
- Rapidly falling headline inflation in 2024:Q3 could feed into backward-looking inflation expectations, easing price pressures.

A larger and more front-loaded fiscal consolidation is needed to help reduce inflation.
Suggested measures (taken together, and front loaded to the extent possible) amount to around 2.5 percent of GDP over 2024-2025, including:
- Rationalizing tax expenditures and broadening the tax base.
- Limiting spending on non-essential capital projects while protecting earthquake-related spending.
- Reforming energy subsidies while protecting vulnerable households.
- Unifying VAT, reducing informality, and boosting compliance to support disinflation and improve fairness.
Assessment of public finances:
- Türkiye’s public debt is sustainable.
- The authorities’ medium-term deficit target of 3 percent provides appropriate fiscal space to address contingent risks from public-private partnerships and state-owned enterprises.

Tight financial conditions will be needed until sequential inflation is firmly on a downward path and inflation expectations converge to the CBRT forecast range.
Policy actions and sequencing:
- Keep tight monetary policy stance until headline inflation and inflation expectations fall to the CBRT’s forecast range.
- If sequential inflation does not continue to fall toward a path consistent with the end-2025 target range, additional tightening might be called for.
- Capital inflows should continue to be fully sterilized to the extent possible to improve policy transmission.
- As the policy rate becomes the binding factor on credit growth, quantitative credit caps should be phased out.
- Continue smoothing temporary exchange rate volatility while avoiding undue real appreciation, and replenish reserve buffers opportunistically.
- As inflation falls and reserve buffers improve, scale back intervention and allow the exchange rate to act as a shock absorber. Intervening against persistent shocks should be avoided.

Still-high inflation inertia needs to be tackled by:
- Setting prices, wages, and other contracts (such as rents) annually and according to forward-looking inflation to reset expectations and protect competitiveness.
- Once relative prices have adjusted, eliminating any backward-looking indexation.
- Aligning public sector administered prices with production and maintenance costs.

Continued vigilance and further reform required to maintain financial stability.
Recommended actions:
- Macroprudential policies should focus on containing systemic risks.
- Simplify lira reserve requirements, improve money market functioning, and expand CBRT term deposits.
- Bring the supervisory framework in line with the Basel Framework, notably for FX, sovereign, credit, and interest risk, consistent with the 2023 FSAP.
- Strengthen the CBRT’s emergency liquidity assistance policies.
Note: Türkiye’s removal from the Financial Action Task Force (FATF) “Gray list” in June is welcome.

The IMF team expressed gratitude to the authorities and private sector counterparts for their hospitality and constructive discussions.

International Monetary Fund — Turkiye: 2024 Article IV Mission Press Release, August 28, 2024