IMF says Turkey is making progress on inflation

Tolga Ildun/Zuma Press Wire

• ‘Even more stringest measures required’
• Forecast for GDP growth lowered
• Turkish economists disagree

Turkey is on the right track to curb inflation and realign the economy for growth, the International Monetary Fund says in a report issued late last week.

However, the IMF says even more stringent measures are needed.   

The IMF acknowledges the Turkish government’s tightening of fiscal policy, but says it should do more to meet disinflation targets.

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The IMF’s forecast of year-end inflation at 43 percent is in line with the upper estimates from the Turkish central bank, issued on August 8. The bank predicted that the consumer price index would rise by between 35 and 43 percent. 

The IMF report also revises the fund’s forecast for GDP, lowering Turkey’s projected growth rate to 3.4 percent for this year, and saying tight monetary and incomes policies will weigh on domestic demand. 

The IMF initially forecast that Turkish GDP would expand by 3.1 percent this year. It raised its expectations in mid-July to 3.6 percent, but has now lowered its growth prediction again. 

The organisation’s medium-term outlook for the Turkish economy remains unchanged, with GDP expected to expand by 2.7 percent next year and inflation to close out 2025 at 24 percent.

While praising the Turkish government’s policies – with central bank interest rates lifted to 50 percent in March and caps on credit introduced, along with reductions in state spending – the IMF called for even stricter fiscal efforts, though it accepted that such a move would cause more short-term economic hardship. 

• Economic woes force investors to dump Turkish stocks

• Turkey holds interest rate at 50% despite inflation risks

• EBRD lowers Turkey’s 2024 growth rate

However, Öner Günçavdı, professor of economics at Istanbul Technical University, says the IMF proposals ignore some of the other issues facing Turkey.

Günçavdı contends that without addressing structural weaknesses such as production levels, the lack of political support for reforms and a failure to attract foreign investment, high interest rates will not fix what ails the Turkish economy. 

“Monetary tightening has been turned into a magic wand to be waved around to fix problems,” Günçavdı says. “I and other more cautious economists are stressing the importance of this issue, but additional monetary tightening on its own won’t deliver results.”

Such policies risk choking the economy and put increasing pressure on the “real sector“, the part of the economy that produces and sells goods and services, as opposed to the financial sector, and households, Günçavdı says. 

“It is fine to have high interest rates, but the question is, how long can the Turkish economy withstand them. That I cannot say.”

The IMF says “a larger and more front-loaded fiscal consolidation is needed to help reduce inflation”.

It also calls for the spending in the regions of southern Turkey hit by twin earthquakes in February last year to be protected. However, a roll-out of support has been slow, despite most projects being exempt from funding cuts. 

Abdülkadir Çelenk, president of the Adıyaman Organised Industrial Zone, located in one of the quake-hit provinces, says the situation is doubly hard for businesses. 

“In all the years I have been a businessman owning and operating factories, and through the many financial crises we have faced in Turkey, I have never experienced anything like this,” he says. 

“We are well aware the financial situation is strained for the country and for small industries there are further problems, but in the quake zone the worst impacted areas are, sadly, still in desperate need of positive discrimination.”

Such support may not fully arrive if any of the downside risks identified by the IMF come into play. 

These include a sharp rise in global energy prices, a big concern for a country such as Turkey that meets most of its hydrocarbon needs through imports; the war in Ukraine; and a reversal of capital flows, signs of which have been seen in recent weeks as overseas investors move out of Turkish shares.