Türkiye aims high, as the country strives for the global high-income club. To that end, of course, a balanced and sustainable growth trend, as well as efficiency-based investments, employment, production and a revived export process through structural reforms, is needed.
The country is determined to increase its economic competitiveness. Yet, it will need to improve the innovation and production capacity of the economy and accelerate the transition to digitalization and a green economy. Combating the informal economy, developing and strengthening the human capital base, and increasing its employment capacity are also essential. Policies must be developed to ensure and endure macro-financial stability and inclusive development. For this purpose, policymakers aim to develop a holistic strategy and new practices in monetary, fiscal policy and structural reforms. New investments and considerable progress are planned in renewable energy. New incentives and extended funding for investments in high-value-added strategic sector, selective credit mechanisms, and further structural reforms to secure sustainable development and macro-financial stability are in order. Türkiye needs to ensure long-term, inclusive growth and sustainable development.
The newly updated medium-term program (MTP) provides a well-timed overview of the current outlook as well as new targets, challenges and opportunities ahead. The MTP also aligns with the 12th Development Plan and provides a base for the upcoming budget plans and other macro public programs. These amendments are indeed timely adjustments. The program serves as a rejuvenated road map, a benchmark program that includes key priorities and projections regarding fiscal sustainability, curbing inflation (and anchoring expectations), and mitigating the current account (CA) deficits. More specifically, the MTP for 2025-2027 includes key targets such as fighting relatively high inflation, reducing CA and budget deficits, overall macro-financial stability and sustainable development.
Türkiye already has key economic challenges awaiting resolution. The list includes (but is not limited to) nominal volatilities, CA deficits, uncertainties, inadequate savings, external finance needs and rising inequalities. The external financing deficit needs to be fixed to reduce risk premiums. Above all, a balance between high growth rates and low inflation targets will be required looking forward. After all, further contractionary policies to curb inflation might lead to weaker growth and fewer employment opportunities (as well as financial unrest). Negative implications (of the tight policies) for the real economy and businesses should be reconciled.
Growth has surely weakened in the past year or so, primarily due to contractionary policies since June of 2023, as well as the austerity measures since late spring of 2024. Despite the earthquake and other global negativities, growth in 2023 was above 5%. The 2024 target is down, though.
Macro-financial stability
Macro-financial stability is a top priority in Türkiye. Accordingly, the end of 2024 inflation target has been updated to 41.5% in the MTP. The post-pandemic demand surge, supply chain breaks, volatility in commodity prices and exchange rate fluctuations led to high inflation between 2022 and 2023. However, the disinflation process has already kicked off. Inflation dropped to 52% in August. Compared to the 2024 peak, there is already a decline of 23.5 points. It surely matters to reduce the budget deficit, trade deficit and the CA deficit to sustainable or reasonable levels, too. Improvement in the CA deficit is vital, as it means a decrease in the need for external finances. It also reduces the country's vulnerability to external shocks.
The CA deficit has decreased from $60 billion a year ago to below $20 billion as of July 2024. Weakening domestic demand has already led to a substantial decline in the deficit. The CA deficit target is reduced from 3.1% to 1.7% for 2024. On the other hand, decreasing the CA deficit could also lead to more resilience and decreasing external vulnerabilities. The trade deficit has recently been narrowing. Exports have slightly weakened due to weaker demand from the West and relative real appreciation in domestic currency. But imports are further down thanks to decreasing domestic demand. The budget deficit is also projected to be mitigated gradually. It has recently surged due mainly to the February 2023 earthquakes hitting southeastern Türkiye. Raised taxes, expanded or newly introduced corporate taxes, and lifted exemptions are expected to help with macro-fiscal balances. Yet, first and foremost, a balance between fiscal balance and raised tax burden is needed.
Undoubtedly, reducing the exchange rate volatility also strengthens the fight against inflation. Türkiye also aims to stabilize exchange rate volatilities to mitigate inflationary expectations. The fact that volatility in global commodity prices has decreased is also in Türkiye's favor. Türkiye has no target or forecast for exchange rates. It aims to manage expectations and stabilize the market expectations of exchange rates. Capital inflows and international reserve holdings have also recently improved. CDSs are down and the ratings are up. All three major rating agencies have raised Türkiye’s credit ratings in 2024. Decreasing CA deficit, rising reserves, minimizing FX-protected accounts, decreasing CDS premiums and rising rates all help increase economic and financial resilience. The long-awaited stock market rally is also in order.
The post-election policy shift and the new rational policies era have led to relative overall stability. After the 2023 election, Türkiye departed from its former expansionary policies and integrated into the tightening trend around the world.
The recently announced austerity measures already have a three-year trajectory. The monetary tightening wave post-2023 election has also raised the policy rate from 8.5% to 50%. Fiscal policy, too, is complementing the contractionary monetary policy.
Türkiye is not doing badly in its debt figures either. The ratio of EU-defined public debt to gross domestic product (GDP) is expected to decrease to below 25% by 2027. The public debt to national income ratio was less than 30% by the end of 2023. In 2024, this rate of decline will continue with the ongoing fiscal tightening. Meanwhile, this ratio of EU-defined public debt to GDP is almost 70% for developing countries and well above 100% for developed economies. The household debt to national income ratio in Türkiye is 11%, again well below the averages of developing countries (49.1%) and developed countries (71.8%).
Improvements in all these macro parameters have also positively transformed the perception of the Turkish economy and have increased investor interest. While risk premiums are decreasing, recovery in credit scores and national reserves is substantial. Gross reserves have reached past $150 billion. Access to external financing is improving and the cost of external financing is also decreasing.
Inequalities matter
Türkiye has increased its national income from $238 billion to over $1.1 trillion in the past 20 years. The country is currently the 17th largest economy on a nominal basis and the 11th largest in PPP terms. The PPP-based income per capita has also increased from a little over $9,000 to almost $43,000.
Turkish GDP is expected to reach $1.33 trillion by the end of 2024 and nominal per capita income is expected to increase to over $15,000. By 2027, per capita income will exceed the $20,000 threshold.
Another key domestic challenge (more so in the post-pandemic era) is income inequality. Obviously, fighting wealth inequality is rather difficult; yet, at the very least, income inequality should be addressed easily using the right policies. Minimum wage policies and ensuring inclusive growth are two primary priorities.
Due to inflationary concerns, wage growth was limited in 2024 despite relatively high inflation realization. Fixed-income, lower to middle-income groups were (particularly) negatively impacted. However, the share of labor in national income has also improved back to 40%, long after the decline post-pandemic.
Despite the recent improvement, there is still much to do to ensure inclusive growth and more equitable income distribution. Yet, Türkiye is surely set to achieve its macro goals.
