World Bank and the Organisation for Economic Co-operation and Development (OECD) have upgraded their growth forecast for Türkiye’s economy for 2023, citing domestic demand as the main driver and challenges over inflation and rebuilding after devastating earthquakes in early February.

The Turkish economy is projected to expand by 3.2% this year, the World Bank said in its latest Global Economic Prospects report. This is up from a 2.7% forecast issued in January but below a 5.6% growth rate in 2022.

The development lender sees the economy growing 4.3% next year, compared to its earlier forecast of 4%. It expects Türkiye to grow by 4.1% in 2025, it said Tuesday.

The OECD expects the Turkish economy to grow 3.6% in 2023, up from its projection of 2.8% expansion in March, according to its latest Economic Outlook report, released on Wednesday.

In contrast to the World Bank, the Paris-based group lowered its 2024 forecast, now seeing the economy growing 3.7% versus a 3.8% projection in March.

The World Bank cited the fallout from the catastrophic earthquakes that struck Türkiye’s south on Feb.6, killing over 50,000 people, leveling hundreds of thousands of buildings and causing massive infrastructural damage.

"Türkiye was hit by two major earthquakes in early February, with direct losses estimated at 4% of 2021 GDP. However, the full costs of recovery and reconstruction could be twice as high," its report said.

It also referred to the uncertainties over monetary policies and high inflation, which has moderated since the beginning of the year, lastly easing to an annual 39.6% in May, according to official data.

"The evolution of macroeconomic policies is uncertain against the backdrop of high inflation, which has been met with further interest rate cuts by the central bank, alongside the general elections that took place last May," it said.

President Recep Tayyip Erdoğan, who was reelected on May 28 to extend his rule into a third decade, announced his new Cabinet at the weekend and reshuffled his economic team. Erdoğan named Mehmet Şimşek, a former deputy prime minister who foreign investors well regard as treasury and finance minister.

Şimşek served as finance minister between 2009 and 2015 and deputy prime minister in charge of the economy until 2018. Soon after taking office, the former Merrill Lynch economist said: "We have no choice but to return to the rational ground."

Analysts say Şimşek’s appointment and remarks could signal the government’s departure from economic policies centered on low-interest rates to fight stubborn inflation, among others.

The World Bank stressed that exchange rate depreciation, high current account deficit, low net foreign exchange reserves and high inflation present significant challenges for Türkiye.

The Turkish lira fell 7% to a record low on Wednesday, propelled by what is said to be likely the loosening of stabilizing measures for the currency as markets weigh the economic policies of the newly elected government.

The lira stood at 23.17 against the dollar at 1023 GMT on Wednesday, bringing its losses to over 19% this year.

Despite the headwinds, the Turkish economy remained resilient in the first quarter as Türkiye remains a key contributor to the growth of Europe and Central Asia, the World Bank said.

The economy expanded 4% in the January-March period, growing strongly despite the impact of the February tremors.

While domestic demand remains a key driver for the Turkish economy’s growth, the revised projections are partly a result of positive momentum from strong growth recorded in late 2022 and additional government support to households, the World Bank said.

Reconstruction efforts from the earthquakes are also expected to support investment, it added.

The OECD said post-earthquake monetary and fiscal policies would continue to support the economy.

However, it said anchoring inflation expectations will be challenging. "Monetary policy should be tightened, and clear communication should be provided about future steps," the group noted.

The easing drive aligned with the government’s economic program has seen the Turkish central bank slashing the benchmark policy rate to 8.5% from 19% in 2021.

OECD said the weak export impact would be observed in Türkiye’s economic growth in 2023, while it noted the domestic demand would continue to be the key driver of growth.

The report also suggested that the unemployment rate would remain close to 10%, and the relaxed financial conditions would keep inflation above 40% this year and in 2024.

OECD expects inflation to be 44.8% this year and 40.8% in 2024.