Türkiye’s Treasury and Finance Ministry is ready to do "whatever" is needed and could borrow to help withdraw abundant lira liquidity from the market if the central bank requires it, a top economy official said Wednesday.
Treasury and Finance Minister Mehmet Şimşek reaffirmed price stability as the government’s utmost priority and stressed the Central Bank of the Republic of Türkiye’s (CBRT) "serious efforts" in quantitative tightening.
"If our central bank needs it, we will borrow to withdraw liquidity, even beyond our needs if necessary. The functionality of fiscal policy here is essentially to do whatever is necessary to ensure price stability," Şimşek told an event in Istanbul.
"While ensuring that inflation is not created through fiscal expansion, we will closely work with our central bank to withdraw excess liquidity from the market if necessary, and we will do whatever is required for this," he said.
Last week, the central bank kept its benchmark policy rate unchanged for a second consecutive month, as expected, but remained wary of inflation risks.
It also introduced new measures to tackle excess liquidity, support Turkish lira deposits, and prevent excessive lending growth.
The tightening drive since last June took the CBRT's one-week repo rate from 8.5% to 50% as authorities sought to tame inflation, which currently runs at nearly 70%.
It is expected to peak at as high as 75% in May before cooling in the second half of the year.
Officials and the central bank anticipate it will end the year at 38%.
Şimşek highlighted the progress in managing loan growth and monthly inflation, stressing that while the market may not yet fully align with their targets, the situation is manageable and additional measures will be taken if necessary.
He reiterated the importance of price stability, calling it essential for sustainable high growth and societal welfare.
"Inflation is the worst form of taxation," Şimşek emphasized, underscoring the need for price stability to ensure a fairer income distribution, social peace and welfare.
"Türkiye's greatest priority currently is price stability. How will we ensure price stability, and how will we reduce inflation? We are not aiming to reinvent the wheel. The prescription is tight monetary policy, fiscal policy, income policy aligned with targets, structural transformation and increased productivity," the minister noted.
"Where are we in this prescription? For countries that have experienced an inflation shock, reducing inflation to single digits and then to lower levels is a very serious task. It requires time, it is a difficult task and it demands determination and patience."
Transition period ending
Addressing global commodity prices, he noted that they are expected to remain relatively stable in real terms. He pointed out that the markets are not heavily impacted by geopolitical tensions and wars, assuming these conflicts will not spread further.
Şimşek outlined the key elements of Türkiye's disinflation strategy, which includes a tight monetary and fiscal policy, income policies aligned with targets, structural transformation and productivity increases.
He acknowledged the challenges faced by countries experiencing inflation shocks and stressed that reducing inflation to single digits would require time, determination, and patience.
Citing a study of 100 inflationary shocks in 56 countries, Şimşek noted that it typically takes three to four years to return inflation to pre-shock levels.
"We defined our first year, from June 2023 to mid-June 2024, as a transition period, and we shared this from the outset. This transition period ends this month," he explained.
Şimşek provided insights into the medium-term program, noting that it is essentially a disinflation roadmap encompassing all policies, tools, agendas and goals.
He expressed optimism about global economic developments, particularly in the second half of the year, when he expects to see a strong recovery among Türkiye's trading partners.
Citing IMF's latest World Economic Outlook report, Şimşek mentioned that a serious recovery is anticipated in the European Union, Middle East, North Africa and Central Asia compared to 2023.
"This is good news because, as we slow down domestic demand to combat inflation, the additional contribution from external demand will be very valuable," he said.
"There is a successful disinflation globally, and a soft landing has been achieved worldwide, which is very good news. Although there are question marks regarding the final stage, disinflation is expected to continue and reach a point parallel to the targets in 2025."
Close to positive territory in reserves
Şimşek said the central bank is close to achieving a positive net international reserve position, excluding swaps.
"We are very close. Concerns about our reserves will soon be largely off Türkiye's agenda," he noted.
"However, we are still at the beginning of our journey, and it's important to remember that."
The recovery in the CBRT's net international reserves, excluding swaps, is estimated to have reached nearly $60 billion in eight weeks since the local elections in late March.
The data the central bank is due to unveil on Thursday is likely to show that its net reserves, excluding swaps, recovered to minus $6 billion in the week through May 24, according to bankers.
They hit a record low of minus $65.5 billion on March 29 and recovered to minus $14.1 billion in the week through May 17.
Şimşek reported significant improvements in external financing, with the rollover ratio for banks exceeding 150% and reaching nearly 120% for the real sector.
He mentioned that banks have secured over $4 billion from global capital markets recently, and the World Bank and similar institutions have committed at least $60 billion to Türkiye over the next three years.