Turkey's policy change has reduced imbalances and revived confidence, says IMF

Turkey’s policy turnaround has reduced economic imbalances and revived confidence, the International Monetary Fund (IMF) said after the Article IV consultations.

Headline inflation has fallen as tighter financial conditions weigh on domestic demand, the IMF said on Saturday.

“Market sentiment improved markedly with domestic and foreign investors shifting to lira-denominated assets while falling commodity prices, buoyant exports and reduced gold imports strengthened the account current, supporting a strong improvement in the position of gross and net reserves”, it is indicated. noted further.

Turkey has been implementing tight monetary and fiscal policy since last year to address some of its major imbalances, including the current account deficit and foreign exchange reserves, and to curb inflation.

The fund said in its statement that “a decisive change” in economic policy over the past year has tightened Turkey’s overall policy, adding that the Central Bank of the Republic of Turkey (CBRT) “brought back the ex ante real policy rate at a positive level. territory while reducing regulatory complexity.

Turkey’s central bank has raised its policy rate by 4,150 basis points since last June to contain high inflation, which in September plunged below its policy rate for the first time since 2021.

The annual inflation rate fell to 49.4% last month from nearly 52% in August and sharply from 75.45% in May.

Besides raising Turkish central bank rates from 8.5% to 50%, the government has increased taxes and some fees to increase revenues, while implementing fiscal measures to balance risks in the economy.

Inflation will fall further

Under a “gradual policy adjustment” by the authorities, inflation is expected to continue to fall, the IMF said, forecasting that “contracting ex ante real policy rates, moderate wage growth and fiscal policy more restrictive in 2025 should bring inflation to 43%. this year and 24% at the end of 2025.”

“Disinflation and improved confidence will support a reduction in the current account deficit to around 2% of GDP (gross domestic product) and reserves to around 100% of the IMF adequacy measure,” he said. it also indicated.

The fund expects the Turkish economy to grow by 3% this year and 2.7% in 2025, while forecasting a recovery in the growth rate towards 4% in the medium term.

Additionally, the fund said the tax and spending measures “support efforts to restore fiscal prudence and the commitment to stronger revenue policies has enhanced credibility.”

He also noted that the country’s credit default swap (CDS) spreads are now “at about half their mid-2023 levels.”

The risks around the reference scenario are significant and “skewed downward,” the fund said.

The International Monetary Fund has called for a continuation of restrictive, data-driven monetary policy in Turkey “until inflation converges towards the target”, while praising authorities for the decisive policy tightening since the mid-2023.

“Directors called for a continuation of restrictive, data-dependent monetary policy until inflation converges to target levels. They agreed that the central bank should stand ready to tighten further if necessary to ensure that the path to disinflation remains on track,” the IMF said.

Turkey’s central bank has kept rates unchanged since March and, according to recent polls, is expected to keep the current rate unchanged at its next meeting on Thursday.

At its September committee meeting, the bank reaffirmed that it “remains very attentive to inflation risks”.

“The tight monetary stance will be maintained until a significant and sustained decline in the underlying monthly inflation trend is observed and inflation expectations converge towards the projected forecast range,” a- he indicated.