Recent Economic Developments

The Government’s macroeconomic policy response to COVID-19 was swift but focused on loose monetary policy and rapid credit expansion. Turkey’s economy was one of the few in the G20 and OECD to experience positive growth in 2020. A favorable base effect, an easing of restrictions permitted by accelerated vaccinations, and supportive external demand led to double-digit GDP growth in the first half of 2021, returning the economy and employment rate to pre-crisis levels.

GDP is expected to grow by 8.5 percent in 2021, but regaining monetary policy credibility and containing high and rapidly rising inflation will be the major challenges. Good progress on expanding vaccination coverage allowed pandemic-related restrictions to be relaxed in May, supporting a recovery in domestic demand. Private investment and consumption of durables, and increasingly services, have been major contributors to growth, despite the persistently high cost of borrowing and easing of fiscal support. Exports were buoyed by a strong recovery in external demand, a currency depreciation, and an opportunity for Turkey to gain market share in the EU as Asian exporters grappled with rising logistic costs and global supply chain constraints

Inflation continued to rise, with the weakening of the lira, rising international commodity prices, and demand-side pressures. In August, consumer price inflation reached 19.3 percent and food prices soared by 29 percent, while producer price inflation rose by 45.5 percent. Despite this, the central bank reduced the policy rate to 18 percent, resulting in negative real interest rates and rising policy uncertainty among investors already conscious of frequent changes of the central bank governor. Following a credit surge in 2020 through public banks, credit growth declined from 30.9 percent at the end of 2020 to 9.3 percent in August 2021 in annualized foreign exchange–adjusted terms. As forbearance measures are still in place, nonperforming loans are still low at 3.7 percent.

Despite a rising interest burden and elevated COVID-related expenditures, the central government fiscal deficit declined to 1.6 percent of GDP in the first half of 2021, thanks to strong tax revenue growth driven by buoyant domestic demand. On the other hand, general government debt stock rose from 32.7 percent in 2019 to 39.8 percent in 2020.

The 12-month rolling current account deficit narrowed to 3.9 percent of GDP as exports recovered sharply and gold imports declined. This, combined with new swap deals and the global expansion of the International Monetary Fund’s SDR, supported an increase in gross foreign exchange reserves to $122 billion in September. However, the reserves net of short-term drains remains negative at - $21.1 billion.

Supported by economic growth, nearly 3 million jobs were generated in January–July 2021, returning employment to pre-crisis levels. Nevertheless, despite new entrants, labor force participation remains low at 52.1 percent.

Turkey has successfully vaccinated more than 52 and nearly 54 million people (84 percent of the eligible population) with their first dose. However, a recent surge in provinces with low vaccination rates has led to close to 20,000 cases and 250 deaths daily.

Economic Outlook 

Although the growth momentum is expected to wane in the first half of 2021, the economy is still expected to grow by 8.5 percent in 2021 before returning to a path of 3 percent and 4 percent in 2022 and 2023. These baseline projections assume no further COVID-19 restrictions in Turkey or its major export markets and no excessive flare-ups in macro-financial conditions. 

Inflation is forecasted to stay high but gradually decline from 17.7 percent in 2021 to 15 percent and 13 percent in 2022 and 2023. As tourism and exports recover, the current account deficit is expected to narrow to 3 percent of GDP in 2021. The general government deficit is projected to decline to 3.4 percent in 2023 as temporary tax reductions and COVID-19-related transfers are reined in.

External risks are balanced, with the upside of a quicker-than-expected recovery in global demand being netted out by potential global financial market disruptions caused by future tightening expectations and supply chain constraints. The continuation of loose monetary policy could further weaken investor confidence, heighten market volatility, and threaten macro-financial stability in the upcoming period. The banking sector remains highly capitalized, with adequate foreign exchange buffers. However, the expected removal of forbearance measures is likely to put pressure on banks’ balance sheets.

A simulation analysis of the impacts of the pandemic suggests that Turkey had 1.6 million more poor people in 2021 than 2020, reaching the highest poverty rate since 2012. Swift early government action, including household support measures, prevented worse outcomes. However, these measures expired as of July 2021, and rising COVID-19 cases and lockdowns will require additional support to protect vulnerable households. The strong rebound in economic growth, the labor market, and household income is expected to reduce the poverty rate from 12.2 percent in 2020 to 11.6 percent in 2021. Further poverty reduction hinges on ensuring an inclusive recovery with adequate support for vulnerable groups.

~Source: worldbank.org