Turkey’s economy is likely to expand at a much slower pace this year as rising domestic macroeconomic and financial challenges moderate growth in 2022 following an unexpectedly strong economic growth in 2021, says the latest edition of the World Bank’s Turkey Economic Monitor report, released on 25 February, 2022.
Frequent changes in the monetary policy setting, epitomized by a series of interest rate cuts since last September, sent the Lira dropping to historic lows and inflation soaring to record highs. While exports boomed in 2021, these challenges have eroded real incomes for the poorer households.
The COVID-19 pandemic added to the problem, and negatively impacted poverty reduction. While pandemic-related fiscal support measures helped soften the blow, it is estimated that the pandemic pushed an additional 1.6 million people below the $5.50 poverty line in 2020, raising Turkey’s poverty rate to 12.2 percent, from 10.2 percent in 2019.
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It is also estimated that a 1 percent increase in consumer prices in Turkey raises the number of poor by 2 percent, although income support and changes to consumption patterns could dampen this effect. With official statistics showing annual inflation having increased from 15 percent in January 2021 to 48.7 percent in January 2022, it is likely that the poverty rate remained high in 2021.
High and persistent inflation will be the main macroeconomic challenge in the medium-term
Turkey’s fiscal position – a traditionally strong anchor for the economy – will also likely be under pressure from the exceptional measures taken to stabilize the Lira and to lower inflation. The report stresses the need for normalization of monetary policy and a fiscal strategy that prioritizes fiscal sustainability as well as meeting pressing pandemic related health system and social protection needs; well-targeted public transfers for vulnerable households and firms; and efforts to broaden the tax base to generate revenues.
“These are challenging times for the Turkish economy and households. Success in reigning in inflation and renewed focus on structural policies are warranted to restore the economy’s ability to mobilize savings, stimulate investment, and generate inclusive and poverty-reducing growth in the long-term,” said Auguste Kouame, World Bank Country Director for Turkey.
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Growth is set to decline to 2 percent this year, from an estimated 10 percent in 2021, firming to a modest 3 percent in 2023, as high inflation and policy uncertainty weigh on private consumption and investment. As in 2021, growth in 2022 is expected to be largely driven by robust growth in exports to the European Union (EU), with the additional prospect of growth in tourism. Recent macro financial instability has put pressure on bank balance sheets and undermined efforts to develop domestic sources of long-term finance.
Risks to the outlook are tilted to the downside
The headwinds include risks from the pandemic at home and abroad, climate change related disasters, price pressures and value chain disruptions at the level of the global economy, and the prospect of interest rate tightening in advanced economies and the resulting tightening of global liquidity conditions.
“Mitigating the risks to the growth outlook of 2022 and 2023 will require well-coordinated monetary and fiscal policies that stabilize the economy in the short term and allow attention to be reoriented towards realizing Turkey’s growth potential in the medium term,” said Hans Beck, World Bank’s Lead Country Economist for Turkey.
A focus on improving Turkey’s global competitiveness can also reverse Turkey’s declining foreign direct investment (FDI) and raise it to levels that are comparable with other large emerging markets. Turkey would also do well in anticipating and preparing for the impacts of the EU’s Carbon Border Adjustment Mechanism, which will affect Turkish exports to the EU, the report adds.
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