Finance Minister Şimşek: We Are on the Verge of a Strong Disinflation Process

Speaking at the London Conference 2024 organized by Chatham House, Minister of Treasury and Finance Mehmet Şimşek stated that the market is beginning to be convinced that the economic program will reduce inflation, saying, “We are now on the verge of a strong disinflation process.”

Şimşek noted that the Turkish economy faced significant macroeconomic challenges around this time last year.

Şimşek mentioned that Turkey is the world’s 11th largest economy in terms of purchasing power parity and highlighted the significant budget deficit following last year’s earthquakes.

He explained that a series of measures, including tax increases and spending controls, have been implemented to address these issues, stating, “Our program is currently working. We have a monetary policy stance that has anchored inflation expectations again. Inflation peaked at 75% in May but is showing a rapid downward trend. We have a robust program that will help us achieve price stability, rebuild fiscal discipline, reduce the current account deficit, and accomplish structural transformation, including green and digital transitions.”

Şimşek predicted that inflation will drop to the low 40s or high 30s by the end of the year, to around 10% in 2025, and to single digits in 2026.

Highlighting significant progress within a year, Şimşek recalled that Turkey’s country risk premium (CDS) fell from around 700 basis points to approximately 250 basis points.

He also emphasized the significant improvement in access to foreign markets, stating, “The Central Bank’s foreign exchange reserves increased by over $70 billion since the end of March. The current account deficit has more than halved. The current account deficit is likely to be between 2% and 2.5% of GDP, down from 6% last year. Consequently, monetary policy started from scratch, and now we are on the verge of a strong disinflation process.”

While acknowledging that inflation is still high, Şimşek remarked, “The market has started to believe that the program we have implemented will reduce inflation.”

Şimşek continued:

“We are using all the necessary tools to control inflation. From the outset, we emphasized the importance of being patient and determined in all our communications with the public. We are in a rebalancing process in the economy, which may cause some slowdown. Slowdown is certainly not easy, but sometimes it is necessary to curb domestic demand to address imbalances. We expect external conditions to be supportive this year. In previous periods, we faced headwinds due to external conditions, but this year we anticipate a revival in external demand with growth in our main trading partners. So far, the program’s results have reduced macro-financial instability risks.”

Şimşek noted that domestic deposit holders also have faith in the program and are starting to convert their deposits into lira. He stated that banks’ foreign debt renewal rates were 96% in the first half of last year and are now approaching 150%.

Şimşek shared that the real sector’s foreign debt renewal rates increased from 73% to 119%.

“Europe Lacks a Strategic Perspective When It Comes to Turkey”

Evaluating economic relations with the European Union (EU) and developments in international trade, Şimşek pointed out that Turkey performed well, particularly in attracting foreign direct investments, when it was firmly committed to EU membership and expectations were high a decade ago. He concluded:

“Europe lacks a strategic perspective when it comes to Turkey. To be frank, Europe did not provide an opportunity for Turkey. However, the program we are implementing today focuses on improving the investment environment, governance, and global integration. These are key to attracting foreign direct investment. Increasing predictability is at the core of our program.”

source: aa.com.tr/ prepared by Melisa Beğiç

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