Türkiye's policy turnaround has reduced economic imbalances and revived confidence, the International Monetary Fund (IMF) said as it concluded an Article IV consultation.
Headline inflation has fallen as tighter financial conditions are weighing on domestic demand, the IMF said on Saturday.
"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," it further noted.
Türkiye has been implementing a tight monetary and fiscal policy since last year to address some of its key imbalances, including the current account deficit and foreign exchange reserves, and to curb inflation.
The fund in the statement said that "a decisive shift" in economic policies over the past year has tightened Türkiye’s overall policy stance, adding that the Central Bank of the Republic of Türkiye (CBRT) "has brought the ex ante real policy rate into positive territory while reducing regulatory complexity."
The Turkish central bank lifted its key rate by 4,150 basis points since last June to contain elevated inflation, which in September dove below its policy rate for the first time since 2021.
The annual inflation rate dipped to 49.4% last month from nearly 52% in August and sharply when compared to 75.45% in May.
Apart from the Turkish central bank hiking the rates to 50% from 8.5%, the government raised taxes and some fees to boost income, while implementing fiscal measures to balance risks in the economy.
Inflation to further decline
Under the authorities’ "gradual policy adjustment," inflation is expected to further decline, the IMF said, projecting that "contractionary ex ante real policy rates, moderating wage growth, and more contractionary fiscal policy in 2025 are expected to reduce inflation to 43% this year and 24% in end-2025."
"Disinflation and improved confidence will support a narrowing of the current account deficit to about 2% of GDP (gross domestic product) and reserves to around 100% of the IMF’s adequacy metric," it also said.
The fund expects the Turkish economy to expand by 3% this year and 2.7% in 2025, while it sees the growth rate recovering toward 4% in the medium term.
Moreover, the fund said that tax and expenditure measures "underpin efforts to restore fiscal prudence and the commitment to stronger incomes policies has strengthened credibility."
It also noted that the country's credit default swaps (CDS) spreads are now "at about half their mid-2023 levels."
Risks around the baseline are significant and "tilted to the downside," the fund said.
The International Monetary Fund called for continued tight, data-driven monetary policy in Türkiye "until inflation converges to target" as they commended the authorities for the decisive policy tightening since mid-2023.
"Directors called for continued tight, data-dependent monetary policy until inflation converges to target levels. They agreed that the central bank should stand ready to tighten further if needed to ensure that the path of disinflation stays on track," the IMF said.
The Turkish central bank held rates steady since March and according to recent polls is expected to maintain the current rate unchanged at the upcoming meeting on Thursday.
The bank in its September committee meeting reiterated that "it remains highly attentive to inflation risks."
"The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range," it said.