ľ¹ÏÓ°Ôº

Country Context

°Õ¨¹°ù°ì¾±²â±ð is the 17^th largest economy in the world, according to the IMF, with a GDP of $1.024 trillion as of 2023. It is a member of the OECD and the G20 and an increasingly important donor of official development assistance (ODA).

°Õ¨¹°ù°ì¾±²â±ð pursued ambitious reforms and enjoyed high growth rates between 2006 and 2017, which propelled the country to the higher reaches of upper-middle-income status and reduced poverty. Real GDP growth averaged 5.4% between 2002 and 2022, resulting in income per capita (in real terms) that was more than doubled over the same period. Growth was accompanied by rapid poverty reduction: the poverty rate decreased from above 20% in 2007 to 7.6% in 2021. 

For °Õ¨¹°ù°ì¾±²â±ð to preserve and further its progress, it must navigate through significant challenges that encompass economic resilience, poverty and inclusion, and sustainability. Key among these is revitalizing economic growth in a post-COVID era marked by a challenging macroeconomic climate and a downward trend in productivity observed since the mid-2010s. Furthermore, although economic expansion has continued, the reduction in poverty rates has lost momentum since 2016, hindered by increasing inequality. On the environmental front, °Õ¨¹°ù°ì¾±²â±ð¡¯s industrial base and transport heavily relies on carbon-intensive processes and fossil fuels, presenting both challenges and opportunities in light of the EU¡¯s Carbon Border Adjustment Mechanism¡ªa critical consideration given the EU¡¯s role as a major market for Turkish exports. Lastly, °Õ¨¹°ù°ì¾±²â±ð¡¯s distinct geographic and socioeconomic conditions significantly increase its vulnerability to the adverse effects of climate change, highlighting the need for broad adaptation measures.

°Õ¨¹°ù°ì¾±²â±ð is addressing the effects of the earthquakes that hit the country in 2023. They caused more than 50,000 casualties, injured 107,000 people, damaged or destroyed 1.9 million housing units, and displaced 3.3 million people, of whom two million needed shelters. The assessments estimated the recovery and reconstruction needs at around $81.5 billion. Risks also remain high, with about 70% of the country¡¯s population living in first- and second-degree seismic zones.

Following the May 2023 elections, the economic team launched a comprehensive policy set to address past macroeconomic imbalances, especially high inflation. Since then, °Õ¨¹°ù°ì¾±²â±ð has been moving to normalizing its macroeconomic strategies. The country experienced a robust economic expansion of 4.5% in 2023. However, this growth rate is expected to moderate to slightly above 3% in 2024, before picking up again in subsequent years on a stronger basis. Longstanding macro and structural challenges that undermine potential growth¡ªincluding high inflation, low productivity growth, and weakening foreign direct investment¡ªwould require robust fiscal measures and ambitious structural reforms to help accelerate sustainable economic growth.

Last Updated: Oct 23, 2024

Strategy

The °Õ¨¹°ù°ì¾±²â±ð Country Partnership Framework  (CPF) is the World Bank Group strategy to deliver impactful solutions at greater scale and speed in °Õ¨¹°ù°ì¾±²â±ð over FY24-FY28. The CPF is fully aligned with the World Bank Group¡¯s mission of ending extreme poverty and promoting shared prosperity on a livable planet and with the government¡¯s 12th National Development Plan (NDP) 2024-2028. The framework  aims to accelerate progress towards the Sustainable Development Goals (SDGs) and support recovery and reconstruction from recent shocks. The CPF outlines how the World Bank Group will further scale up impact in one of its largest country portfolios to meet priority country and global challenges.

A key focus of the CPF is to help the country mobilize private capital to address key emerging challenges on the growth, poverty and inclusion, and sustainability fronts.

During the CPF period, the World Bank Group will focus on selected challenges under three broad areas: 

• High and sustainable productivity growth: The focus will be on promoting climate-smart agriculture to strengthen resilience against climate change and bolster food security; greening the industrial sector to reduce carbon emissions and maintain trade competitiveness; supporting economic recovery in areas affected by the 2023 earthquakes.
• Inclusive services and jobs: To address income and other inequalities, the focus will be to improve jobs for women, youth, and vulnerable groups; reduce disparities in health and education access and quality; and support resilient municipal infrastructure and services.
• Strengthen resilience against natural disasters: To help protect °Õ¨¹°ù°ì¾±²â±ð¡¯s people and economy, the World Bank Group will prioritize disaster resilience and preparedness, management of natural resources and the transition to clean energy.

The CPF also emphasizes the need to accelerate digitalization, vital for boosting productivity and public service delivery. ľ¹ÏÓ°Ôº Group will work across many fronts to accelerate the use of digital technology, including improving the digital business ecosystem, supporting seismic and climate-resilient urban planning, extending hybrid education opportunities and improving financial inclusion.

There are 32 active IBRD operations amounting to $13.1 billion. The portfolio also includes one project financed by the (GEF) and six trust fund-supported projects, including almost $450 million in European Union trust funds through the Facility for Refugees in °Õ¨¹°ù°ì¾±²â±ð. 

Key Advisory Services and Analytics (ASA) Activities: The ASA portfolio is strategically consolidated around the core and extended core ASAs including: Country Climate and Development Report, Programmatic Public Finance Review, Pandemic Preparedness and Response, Country Green Growth, Quality Learning and Emergency Response Roadmap, Understanding the Drivers of Regional Disparities in °Õ¨¹°ù°ì¾±²â±ð and Sustainable, Efficient and Safe Transport for °Õ¨¹°ù°ì¾±²â±ð.

Last Updated: Oct 23, 2024

KEY CONDITIONS AND CHALLENGES

°Õ¨¹°ù°ì¾±²â±ð¡¯s development over the past two decades has been impressive, with real GDP growth averaging 5.4% from 2002 to 2022, more than doubling income per capita. This growth also significantly reduced poverty, halving the rate from over 20% in 2007 to below 10% in 2021. Despite the COVID-19 pandemic, °Õ¨¹°ù°ì¾±²â±ð¡¯s economy grew by 1.9% in 2020 and achieved 11.4% growth in 2021, driven by government policies and strong domestic and external demand, and 5.5% in 2022.

However, these policies also heightened macroeconomic risks, including high inflation, currency depreciation, and a higher current account deficit. Since the May 2023 elections, however, the economic management has moved towards economic normalization. These policies¡ªbased on a tighter monetary policy, a relatively prudent fiscal stance, and a structural reform agenda¡ªhave already achieved important outcomes. The growth rate remained strong in 2023 (5.1%), the current account deficit has significantly narrowed, disinflation started as of June 2024 (after peaking at 75% in May 2024), risk premiums have fallen markedly (from close to 900 bps in summer 2022 to around 270 bps as of September 2024), reserve accumulation accelerated, and the rebalancing of growth has begun. Accordingly, all three major rating agencies upgraded °Õ¨¹°ù°ì¾±²â±ð¡¯s sovereign risk ratings in 2024.  

°Õ¨¹°ù°ì¾±²â±ð¡¯s normalization of macroeconomic policies continues to provide opportunities and challenges. The tightening of monetary policy coupled with decisive forward guidance of the Central Bank have boosted confidence in financial markets, increasing investors¡¯ appetite for Turkish lira assets and lowering medium-term inflation expectations. Meanwhile, despite the tight monetary stance, disinflation will take time and fiscal policy¡¯s support is yet to come. For sustained disinflation, the coordination of monetary and fiscal policy is critical, as is fiscal consolidation, with fiscal policy also supporting vulnerable groups throughout the stabilization period to reduce poverty and inequality.

The economic team, led by Vice President Cevdet Y?lmaz and Minister Simsek, has launched policies to address macroeconomic imbalances, aiming for sustainable growth and stability. °Õ¨¹°ù°ì¾±²â±ð saw a 5.1% economic expansion in 2023, with growth expected to slow to 3.2% in 2024 and to 2.6% in 2025 before rebounding. The Medium-Term Fiscal Program emphasizes shifting growth from private consumption to investments and exports. The government must tackle high inflation, build resilience against climate and earthquake risks, ignite productivity growth, and manage external risks while leveraging opportunities through structural reforms and green transformation. Maintaining current policies is essential for long-term sustainable growth and stability.

RECENT DEVELOPMENTS

Despite substantial tightening of monetary policy, the economy expanded 5.1% in 2023 and 3.8% (YoY) in H1 2024. Private consumption continued to be the main driver of growth, and the contribution of net exports turned positive in Q1 for the first time since Q3 2022. However, growth momentum has slowed in both production and demand. The PMI, which had increased to above the 50-threshold indicating expansion in Q1, fell to a 54-month low of 44.3 by September 2024. Automobile sales declined by approximately 16% (YoY) in July.

The labor market continues to be strong. The seasonally adjusted unemployment rate fell to 8.5% in May, before rising to 8.8% in July. Labor force participation rates increased, reaching 73% for men and 37% for women¡ªthe highest level for women since January 2005. The gross wages and salaries index was 115.4% (44% in real terms) higher in Q2 2024 than in 2023, due in part to large minimum wage increases in July 2023 and January 2024.

The current account deficit, down to $45.0 billion in 2023, continues to improve, with the 12-month cumulative deficit narrowing to $19.1 billion by July 2024. Risk premiums continue to fall with the CDS premiums at approximately 250 in mid-July compared 500 in July 2023 and nearly 900 in July 2022. The government¡¯s commitment to the economic program generated a surge in portfolio inflows, and the resulting real appreciation of the TRY incentivized firms and households to switch from FX to TRY assets. This helped the CBRT to significantly improve its reserves. By end-May, net reserves, excluding swaps, turned positive for the first time since early-2020. By mid-September, net reserves had reached $48.8 billion ($26.5 billion, excluding swaps). However, real TRY appreciation has negatively affected exports in recent months, especially lower-value products, while imports of final consumption goods remain strong.

Inflation peaked at 75.5% in May before easing to a 14-month low of 49.4% in September, entering the positive real interest rate zone, thanks to monetary policy tightening, exchange rate dynamics, and base effects. This figure is still above the Central Bank¡¯s year-end target of 41.5% and market expectations. Inflation is particularly high in some categories making up a larger consumption share of poor households. For example, rental inflation reached over 120% in September. Improvement in inflation expectations slowed down in October. Market participants¡¯ expectations for the year-end is 44.1%, and for the next 12 months, stood at 27.4%.  

Monetary policy normalization and gradual unwinding of macroprudential regulations have helped improve bank profitability and capital adequacy. Banks have eased commercial lending, but high policy rates have driven up deposit and credit interest rates, constraining loan growth. The banking sector¡¯s net FX position has improved, and the risk premium for external borrowing has declined, although external debt costs have increased due to global conditions. Regulatory forbearance is being phased out, which may impact the capital ratio of some banks; however, capital buffers remain adequate. Tighter credit conditions have begun to take a toll on household credit and MSMEs, with increasing credit card defaults and a gradual rise in insolvency and concordat filings, although levels remain moderate.

The annualized budget deficit eased to 4.7% of GDP in Q2 2024, after reaching 5.2% of GDP in 2023. The government has issued a new tax package to generate further revenue for the budget, including regulations to combat the informal economy. Meanwhile, public debt to GDP remains manageable, at 26.1% as of Q2 2024. 

OUTLOOK

Economic growth is projected to slow in the short term, to 3.2% in 2024 and 2.6% in 2025, on the back of tighter policy and subdued global growth, before picking up at 3.8% in 2026. Disinflation started in June and is forecast to continue gradually, given tight monetary policy. The current account balance is forecast to improve further in H2 2024 and remain low in 2025, due to the rebalance in growth composition, which will rely less on domestic consumption and have greater contribution from investment and net exports. General government deficit is forecast to remain high in 2024, given the economic slowdown and earthquake recovery needs, and despite fiscal consolidation efforts.

Poverty is projected to decline more slowly in the short term, to 6.3% in 2024, despite the economic slowdown. Strong labor market performance and minimum wage hikes exceeding CPI increases are the main drivers of continued poverty reduction. However, minimum wage hikes are less likely to reach informal workers or those out of the labor force, such as the elderly or parents with no access to childcare. Moreover, relying on the minimum wage to protect the poor has other economic consequences, notably inflation fueling. Well-implemented and flexible social protection programs can mitigate the economic slowdown¡¯s impact on poverty. Revamping the social protection system to improve targeting and coverage is warranted: in 2021, the share of public transfers to the bottom three deciles was lower than to the top three deciles.

Risks to the outlook continue downside. Inadequate growth rebalancing would challenge macroeconomic stabilization. Domestic private consumption is still robust, and there is a risk that the domestic adjustment will create external imbalances whereby recent real TRY appreciation could further hamper exports and boost non-oil imports. Mounting geopolitical tensions would also hinder exports. The lack of significant fiscal consolidation, primarily on the expenditure side, could slow the disinflation process.

Last Updated: Oct 23, 2024