 on Wednesday urged Turkey to adopt a tighter policy mix to combat its persistently high inflation, which the organization says continues to pose significant economic risks.){kind=link}
The International Monetary Fund (IMF) on Wednesday urged Turkey to adopt a tighter policy mix to combat its persistently high inflation, which the organization says continues to pose significant economic risks.
The recommendation was issued following an Article IV mission to Turkey for consultations on the country’s fiscal policies under the IMF’s Articles of Agreement, led by IMF official James P. Walsh, which concluded its assessment earlier this month.
The IMF’s preliminary findings highlighted a notable improvement in Turkey’s economic conditions since mid-2023. The report praised Turkey’s tighter economic policies, which have reduced crisis risks, bolstered market confidence and led to a decline in the current account deficit to 2.7 percent of GDP in the first quarter of 2024.
Furthermore, international reserves increased by $91 billion since April, while Turkey’s sovereign risk rating was upgraded by international credit agencies, resulting in a drop of nearly 440 basis points in credit default swap (CDS) spreads.
Despite these positive developments, the IMF noted that inflation remains a significant challenge. Headline inflation has eased somewhat over the summer but remains elevated. The IMF warned that without a more aggressive tightening of fiscal and monetary policies, inflation could stand at around 43 percent by the end of December 2024.
The IMF’s report projects that Turkey’s GDP growth will slow to around 3.4 percent in 2024 due to reduced domestic demand. Inflation is expected to gradually decline to 24 percent by 2025, with the current account deficit continuing to shrink to approximately 2.2 percent of GDP. However, the IMF stressed that further efforts are needed to sustain this progress and mitigate downside risks, such as rising global energy prices, geopolitical tensions and potential reversals of capital flows.
The IMF also emphasized the need for a larger and more front-loaded fiscal consolidation to support disinflation efforts. It recommended rationalizing tax expenditures, broadening the tax base, limiting non-essential capital spending and reforming energy subsidies to protect vulnerable households. The IMF also suggested unifying the value-added tax (VAT) and enhancing compliance to reduce informality and improve tax fairness.
Monetary policy should remain tight until inflation expectations align with the Central Bank of the Republic of Turkey’s (CBRT) forecast range, the IMF said. It also recommended phasing out quantitative credit caps and focusing on smoothing temporary exchange rate volatility without hindering the exchange rate’s role as a shock absorber.
Addressing the challenges in Turkey’s financial sector, the IMF called for continued vigilance and further reforms, including simplifying lira reserve requirements, improving money market functioning and expanding the CBRT’s term deposits.