Türkiye on Wednesday unveiled a new comprehensive road map centered on structural reforms, reining in price increases through tight monetary policy and eventually ensuring sustainable economic growth.
Seen as a milestone in the broader policy reversal that began after the May elections, the three-year medium-term program is meant to drive recovery after the devastating February earthquakes.
It is focused on curbing inflation expectations, ensuring growth and employment fueled by production and exports, and strengthening social justice and prosperity.
Presenting the new forecasts, the government jacked up its inflation expectations and cut that of economic growth, but President Recep Tayyip Erdoğan stressed they will not sacrifice economic expansion nor jobs as policies are adjusted.
Erdoğan backed his new economic team's decision to hike interest rates to fight price increases and said tight monetary policy would lower inflation to single digits.
After his May reelection, Erdoğan named a new Cabinet and central bank chief to undertake aggressive interest rate hikes, reversing a long-running easing trend as the government prioritized growth, exports and investment to tackle the chronic current account deficit and bring stubborn inflation down.
The central bank has since roughly tripled its benchmark policy rate to 25% and pledged that monetary tightening will gradually be strengthened as needed, adding that disinflation will be established in 2024.
Analysts believe it will need to raise the rate much higher at the next meeting on Sept. 21 because the inflation has shot back up to nearly 60%.
"We will reduce inflation to single digits with the support of tight monetary policy," Erdoğan said in a nationally televised address announcing the new road map.
"We have no doubt about achieving our goals."
The government sees annual inflation of 65% at year-end and 33% next year, up from 24.9% and 13.8%, respectively, in forecasts it published a year ago. It is expected to fall to 15.2% in 2025, before dipping further to 8.5% by the end of 2026.
The central bank has said inflation will likely rise to near 62% by year-end, the upper bound of its earlier forecast, despite a more aggressive-than-expected 750-point rate hike in August.
Measured in the consumer price index (CPI), the annual inflation surged to 58.94% over the 12 months ending in August. It had reached a 24-year high of 85.5% last October and stood at 47.83% this July after regressing to as low as 38.21% in June.
The government aims for an average 4.5% gross domestic product growth (GDP) rate in the three years to 2026.
It trimmed growth forecasts to 4.4% this year and 4% next year, from 5% and 5.5% previously, according to a presentation by Vice President Cevdet Yılmaz on Wednesday.
It sees the economy expanding by 4.5% in 2025 and 5% in 2026.
The current account deficit is expected to be $42.5 billion (TL 1.14 trillion) in 2023 and $34.7 billion in 2024.
Yılmaz said the road map would include structural reforms that would help reduce uncertainties.
"In the three-year period, we aim to stabilize economic growth and to grow by an average of 4.5% under the leadership of high value-added private sector investments," Yılmaz noted.
Economic activity in the first quarter was affected by massive earthquakes that hit the country's south and southeast on Feb. 6, killing more than 50,000, toppling hundreds of thousands of buildings and seriously damaging the region's infrastructure.
Reconstruction efforts are expected to cost more than $100 billion.
During the medium-term program, Erdoğan said around TL 3 trillion will have been allocated for the earthquake region.
"Our priority is to eliminate the earthquake damage and increase employment with balanced economic growth, reduce inflation to single digits and improve income distribution," he noted.
The government has launched a major housing drive that it says will see it deliver more than 300,000 residential units in the first year and 650,000 in total in the near future.
Data last week showed Türkiye's economy grew by a more-than-expected 3.8% in the second quarter, backed by strong household spending. Yet, activity should slow through year-end as election-related stimulus fades and big rate hikes weigh.
On a quarterly basis, GDP expanded 3.5% on a seasonally and calendar-adjusted basis, also outstripping forecasts. The economy had grown 3.9% in the first quarter.
Türkiye's economy bounced back strongly from the pandemic and grew a revised 5.5% in 2022, extending its hot streak of strong domestic demand and exports. That was despite a slowdown in growth for its main trading partners because of the war in Ukraine, which hurt exports in the second half of the year.
At the end of the program, Erdoğan said they expect to rank among the high-income group countries with an economic size exceeding $1.3 trillion and a national income per capita of around $14,855.
He said the government would curb consumer demand but stressed the strategy would not sacrifice economic growth.
"We will definitely not compromise on economic growth during the period of this program," Erdoğan noted.
"By paving the way for high value-added investments and facilitating their financing, we will ensure healthy growth," he added.
Yılmaz echoed his view. "We will not neglect growth and employment while going toward single-digit inflation," the vice president said.
The program has four main objectives, he noted. "Healing the wounds of disaster, ensuring macro stability and reducing inflation to single digits, maintaining growth and employment, and ensuring social justice."
Yılmaz suggested that the program would feature three main policy instruments, including ensuring fiscal discipline, monetary policy and structural transformations, in addition to earthquake expenditures.
"We expect concrete effects on structural reforms in the medium term. We aim to improve expectations in the short term. We will continue to apply monetary policy in accordance with the needs of the period. The central bank will do its part within the framework of tool independence," he said.
Erdoğan said Türkiye aims to generate 909,000 jobs a year and ensure that the unemployment rate drops to single digits by the end of 2026.
"By strengthening bureaucratic and legal predictability, we aim to attract direct investments to our country," he noted.
The unemployment rate is forecast to decrease to 10.3% next year, 9.9% in 2025, and 9.3% in 2026.
The program sees exports reaching $255 billion in 2023 and jumping to as high as $302.2 billion in 2026.
Tourism income is forecast to total $55.6 billion this year and surge to around $71.3 billion in 2026.
Türkiye's current account deficit-to-GDP ratio is expected to fall to 4% in 2023, from 5.3% in 2022, and to 2.3% in 2026.
