Fitch Ratings upgraded its outlook for the Turkish economy from negative to stable while maintaining its credit rating at B. This was made possible by the new economic team’s shift in economic orientations, which led them to start implementing more conventional policies that help lower inflation, preserve the value of the currency, and boost the country’s foreign exchange reserves. Since the May elections, President Recep Tayyip Erdogan’s administration has started to take a radical turn away from unconventional policies, such as interest rate cuts that have exacerbated the lira crisis and increased inflation.
This article analyses the most significant potential effects of Turkey returning to its traditional economic approach while also identifying the most significant economic policies the country has recently implemented since Erdogan’s victory in the May 2023 elections.
Aspects of the Shift in Economic Policy
Erdogan took a number of steps to reassure foreign markets and investors, including appointing economists Mehmet Simsek and Hafize Gaye Erkan to the positions of Minister of Finance and Governor of the Central Bank of Turkey, respectively, with the discretion to make more conventional economic decisions. The most notable of these steps are as follows:
• Curtailing Quantitative Easing: Starting in June 2023, for the first time in over two years, the new economic team has gradually increased the interest rate from 8.5 percent to 30 percent over the course of four meetings, with the most recent increase occurring on September 21, when the team decided to increase key interest rates by 5 percent, or 500 basis points. This shows the Turkish government’s commitment to combating inflation and currency depreciation, especially in light of the Central Bank’s recent announcement that inflation expectations will reach 58 percent by the end of 2023. The Monetary Policy Committee (MPC) confirmed that it will keep raising interest rates gradually and when necessary.
In addition, the decision to raise interest rates is a clear sign of the Central Bank of Turkey’s independence, which is required to put an end to the unconventional monetary policy that President Erdogan insisted on pursuing during his earlier administrations and which was characterised by lowering the interest rate despite an increase in the general level of prices, a practise that went against what theories suggest about how dropping interest rates contributes to a drop in demand for deposits, which results in more people having money in their pockets and spending more, which eventually raises inflation rates.
The Turkish government unveiled a new economic programme for the years 2024 to 2026, which seeks to boost potential for growth and high-value production, add jobs, and lower the current account deficit. Based on productive investments and an export-oriented strategy, it will primarily be funded by domestic savings and foreign direct investment. Other objectives include expanding job opportunities, enhancing labour market effectiveness and skills, boosting human resources to increase employment, and bringing down inflation to single digits by 2026.
The new medium-term plan, in general, is built upon seven pillars: growth and trade, labour force and employment, price stability, public finances, disaster management, green and digital transformation, and improving the business and investment environment. In this vein, the new economic programme aims to achieve the following growth rates:
Table 1: Target growth rates, 2023-2026
| 2023 | 2024 | 2025 | 2026 | |
| GDP Growth | 4.4% | 4% | 4.5% | 5% |
| Unemployment Rate | 10.1% | 10.3% | 9.9% | 9.3% |
| Inflation Rate | 65% | 33% | 15.2% | 8.5% |
In addition to the aforementioned goals, the economic plan aims to increase exports to $302.2 billion by 2026 from the current level of $255 billion in 2023. It also aims to increase tourism revenues to $71.3 billion by 2026.
• Suspension of the Protected Deposits Scheme: The plan to shield lira deposits from exchange rate fluctuations, which required banks to convert a certain amount of deposits in foreign currencies into lira deposits that enjoy protection from exchange rate fluctuations, has been abandoned by the Turkish Central Bank. This scheme, which was introduced in late 2021, ensures that savers can earn the same potential profits as they would if they kept their foreign currency savings in Turkish lira by paying them the declared interest plus the difference in the price of the dollar between the time of deposit and the time of withdrawal. With the Turkish lira having dropped by more than 20 percent in the month of June alone and by about 30 percent since the beginning of this year, the Central Bank of Turkey has incurred about TL 300 billion ($11 billion) to cover the costs of this scheme.
• Raising Taxes: Turkey increased the value-added tax on goods and services from 18 percent to 20 percent by two percentage points. In addition, it increased the insurance and banking transaction taxes that are levied on personal loans from 10 percent to 15 percent, as well as the value-added tax on everyday items like paper towels and detergents from about 8 percent to 10 percent.
In an effort to address economic issues, Turkey also announced raising the special consumption tax on gasoline and diesel. The tax on gasoline increased from TL 2.52 ($0.1) to TL 7.52, while the tax on diesel increased from TL 2.05 to TL 7.05 per litre.
Future Prospects
The aforementioned policies are intended to help the new Turkish economic team realize the following long-term goals:
• Controlling the Inflationary Wave: Given that high prices erode people’s purchasing power and undermine confidence in the local economy, the high rate of inflation is regarded as the biggest issue facing the Turkish economy and the main barrier to achieving monetary stability. As a result, the current economic team’s top priority is to reduce inflation by implementing measures to reduce market liquidity. The following chart displays Turkey’s annual inflation rate in 2023.
Figure 1: Turkey’s Inflation Rate in 2023 (%)
Source: Turkish Statistical Institute, Consumer Price Index.
Figure 1 demonstrates that the inflation rate experienced a downward trend from January to June, falling from 57.68 percent to 38.21 percent in the current year, before increasing to 47.83 percent and 58.94 percent in the months of July and August, respectively.
• Promoting Economic Growth: The new economic team also stated that it wants to use Turkey’s competitive potential to foster economic growth. For this reason, it established a growth strategy centered on boosting exports, investments, innovation, and productivity. In this regard, it unveiled a number of incentives and reforms intended to boost the business climate, increase competitiveness, draw foreign direct investment, aid small and medium-sized businesses, encourage digital transformation, and diversify export markets. The following graph illustrates the evolution of the GDP growth rate from the first quarter of 2022 through the second quarter of 2023:
Figure 2: Turkey’s GDP growth rate (%)
Source: Turkish Statistical Institute, quarterly gross domestic product
According to figure 2, the Turkish economy’s growth rate decreased from 7.6 percent in the second quarter of 2022 to 3.8 percent in the same quarter of 2023 as a result of the election-related stimulus’s waning and the effects of sharp increases in interest rates, both of which could have a negative impact on the country’s budget deficit and slow down economic activity. Despite this, Moody’s increased its growth predictions for the Turkish economy for 2023 and 2024, respectively, from 2.6 percent to 4.2 percent and 3 percent, respectively.
• Exchange Rate Stability: The new economic policymakers realized the significance of exchange rate stability as a tool for regaining confidence in the Turkish economy. In this vein, the Turkish lira dropped from TL 18.7 per dollar in January 2023 to TL 19.86 per dollar in May and then continued to fall steadily until September 2023 at TL 27.17 per dollar, due to the use of an exchange rate system that is more adaptable, allowing for market-based adjustments and preventing overbearing interventions that deplete foreign reserves.
In conclusion, Turkey’s new economic team, led by the Finance Minister and Central Bank Governor, has attempted to implement more conventional policies since their appointment in May 2023 in an effort to lower inflation, achieve exchange rate stability, and reduce external and financial imbalances.
