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European bank ups Turkey’s GDP growth to 3.5% in 2023

People, Person, Crowd Reuters
Turkey's president Recep Tayyip Erdoğan's post-election fiscal policy has led the EBRD to improve its forecast for the country

The European Bank for Reconstruction and Development (EBRD) has raised its 2023 GDP growth forecast for Turkey to 3.5 percent, up from a previous estimation of 2.5 percent.

The upward revision is driven by the fiscal stimulus in the run-up to the May elections and the shift in the economic policymaking post-election, according to the multilateral development bank’s latest bi-annual growth forecast report.

“Expansionary policies undertaken in the context of the new economic model over the past two years contributed to a relatively strong economic performance by Turkey, but they also exacerbated existing macroeconomic vulnerabilities,” the report stated.

Economic measures enacted include interest rate hikes; increasing policy rates from 8.5 percent in May to 25 percent in September 2023; higher taxes, including increasing value-added tax from 18 percent to 20 percent; and a gradual unbundling of restrictive and costly regulations affecting the banking sector adopted over the past year.

“These steps are positive, although there is a risk that the adoption of orthodox policies may prove short-lived, as the local elections of March 2024 draw nearer and authorities may face growing pressure to sacrifice stability in favour of growth,” EBRD said.

The growth, however, is forecast to decline to three percent in 2024.

GDP growth decelerated from 5.6 percent in 2022 to 3.9 percent annually in the first half of 2023. Inflation has declined from a peak of over 80 percent recorded in October 2022, but remains elevated and is expected to increase to almost 60 percent by the end of 2023.

Furthermore, the government posted record-high fiscal deficits due to commitments made prior to the 2023 elections, such as public sector wage and pension hikes and a rise in expenditures due to the earthquakes of February 2023.

Overall, the EBRD region, which covers 40 economies, is expected to expand by an average of 2.4 percent this year before growing 3.2 percent in 2024 as inflation concerns ease.