Policy turnaround reduces Türkiye’s economic imbalances: IMF

ISTANBUL

The policy turnaround has reduced Türkiye’s economic imbalances and revived confidence, the International Monetary Fund (IMF) has said.

Headline inflation has fallen as tighter financial conditions are weighing on domestic demand, it noted in a statement on Article IV consultation.

“Market sentiment has sharply improved, with domestic and foreign investors shifting into lira-denominated assets while lower commodity prices, buoyant exports and reduced gold imports have strengthened the current account, supporting a large improvement in both the gross and net reserves position,” the fund added.

The financial and corporate sectors appear to have weathered the policy tightening and financial liberalization so far, it said, noting that credit default swaps (CDS) spreads are now at about half their mid-2023 levels.

Contractionary ex-ante real policy rates, moderating wage growth and more contractionary fiscal policy in 2025 are expected to reduce inflation to 43 percent this year and 24 percent in end-2025, according to the fund.

Disinflation and improved confidence will support a narrowing of the current account deficit to about 2 percent of GDP, it also said.

The fund expects the Turkish economy to expand by 3 percent this year and 2.7 percent in 2025.

Risks around the baseline are significant and tilted to the downside, the fund said.

“They include stronger-than-expected wage and price inertia, a reversal of capital flows, higher global energy prices and escalating geopolitical tensions,” it added.