Türkiye has now come to a critical juncture in the realization of its economic goals by trying to reduce inflation, correct misalignments, and restore confidence by tightening monetary and fiscal supplies. The Central Bank of the Republic of Türkiye (CBRT) recently declared a decision to maintain the policy rate of 50% for the seventh consecutive month without any change. This decision to keep a high interest rate was found to be part of the government’s anti-inflationary policy, which has yielded positive results by reducing the inflation rate from 71.6% in June 2024 to 49.4% in September 2024. This means that for the first time over the three years under consideration, the benchmark interest rate is greater than the rate of inflation. However, the struggle against inflation continues, and monthly rates of increase in prices are still a problem. The Deputy Governor of the Central Bank of the Republic of Türkiye, Osman Akçay, said that these measures will remain in place until the central bank’s preferred monthly inflation trend declines sustainably.
Many Turkish people are still unhappy from the pressure of high inflation and costly credit eroding the country's growth prospects. The government expects the consolidation to reduce the deficit to 3.1% within the next five years, from 4.9% in 2024. IMF’s Assessment and Policy Changes, in its latest statement, appreciated the monetary and fiscal policy measures adopted by Türkiye. The central bank has taken the real policy rate to a positive territory. IMF’s view is that inflation will continue to come down, with projections of 43 percent by the end of 2024 and 24 percent by late 2025. IMF also pointed to the following major achievements: simplification of regulation, decline in the price of commodities, and increase in exports, which enhanced the account current in foreign exchange reserves in Türkiye. Moreover, the report expected economic growth in 2024 at 3.0% and 2.7% in 2025, while the medium-term growth might be heading back to 4.0% from 3.5%, even though there are still structural obstacles.
On the other hand, the venture capital market in Türkiye still faces deep problems from high interest rates, although the overall sentiment of the market has increased in the recent past. An angel investor, Hakan Akbas, declared that the VC funding inflow declined by 64% in the first nine months of 2024 compared to the same period of the previous year, and that only 130 deals have been made so far. Due to the high interest rate, local and international investors have been turned off from funding the Turkish startup, and in extension, innovation has been limited.
The government has also applied tax increases and other fiscal measures to support the central bank to bring the public sector budget deficit under control and to curb inflation. “The central bank is applying the brakes, but the government does not want to take its foot off the accelerator”, said former CBRT economist Hakan Kara, referring to the tension between growth and price stability. It is said that since President Recep Tayyip Erdogan changed his course after the elections from a populist economy to more traditional macroeconomic policies, foreign investors have bought $14 billion worth of Turkish bonds since the beginning of the year.
Under these conditions such as consistent currency depreciation, high inflation rates, and fluctuating changes in central bank, governors have kept the worry high among the Turkish people. In the future, the government expects that its stop-go approach to policy changes will help reduce the current account deficit to 2 percent of GDP and gross reserves to 100 percent of the IMF adequacy ratio. For a sustainable growth path, Türkiye has to bear inflationary expectations as its major problem. A large number of households still believe that inflation is going to be higher—at around 70%, while the central bank’s estimate is 38%—and thus prefer spending to saving, which fuels inflation. Türkiye is swimming in choppy waters by keeping strict monetary and fiscal policies to tame inflation without slowing down the economy and by trying to improve the business environment for domestic and foreign investors. Whether these efforts will restore long-term stability remains to be seen.
Edited by: Oya Yamaç