Türkiye
Economic growth is projected to moderate to 3.6% in 2023 due to weaker exports, while domestic demand will remain the main driver of growth. The devastating earthquake at the beginning of this year brought widespread damage in southern Türkiye. However, the boost from reconstruction is expected to largely offset the negative impact from disruption to economic activity. The unemployment rate is expected to stay close to 10%. Easy financial conditions will help keep inflation above 40% in 2023 and 2024 and nominal wages will also grow rapidly.
Following the earthquake, monetary and fiscal policy will continue to support the economy. However, anchoring inflation expectations remains challenging. To this end, monetary policy should be tightened with policy rate increases timed carefully and accompanied by clear communication about future moves. Structural reforms to improve the regulatory framework and ensure a rules-based, level-playing field for the business sector would further strengthen economic resilience.
Reconstruction work from the earthquakes is already underway
At the beginning of 2023, two very large earthquakes and numerous aftershocks hit Türkiye’s southern region. More than 50 thousand people died and more than 3 million people were displaced, and the damage to buildings, infrastructure and production capacities has been huge. Retail sales, turnover indices and industrial production fell sharply in February. However, indicators suggest a rapid recovery in activity as reconstruction work is gathering momentum and trade and industrial production in the earthquakeaffected region have been partly restored. Inflation has decreased, in particular due to base effects, but remains high, and inflation expectations are still above the inflation target of 5%. However, energy prices have declined somewhat in recent months. External imbalances have widened, with the current account deficit reaching 5.3% of GDP at the end of 2022.
StatLink2 https://stat.link/j9prz0
Türkiye: Demand, output and prices
1. Contributions to changes in real GDP, actual amount in the first column.
2. Based on yearly averages.
3. Consumer price index excluding food and energy.
Source: OECD Economic Outlook 113 database.
StatLink2 https://stat.link/5xfiag
The volatility in world energy prices has highlighted the risks arising from high dependency on external energy supply - Türkiye imports 99% of its gas and 93% of its oil. The recent start of natural gas production from the Sakarya field will ease these risks somewhat; estimates indicate that by the end of 2023, domestic gas production will cover 7% of domestic consumption. In 2022, the authorities implemented several measures cushioning households from energy price inflation, including untargeted measures such as tax cuts on energy and the abolition of some electricity fees. These measures are expected to remain in place throughout the projection period.
Monetary and fiscal policy will remain supportive
The government has announced a series of measures supporting those affected by the disaster, including wage-bill subsidies to businesses. A new body, the Disaster Reconstruction Fund, is being established, which will oversee the allocation of resources for the restoration of infrastructure. The EU and other international donors have pledged USD 7.5 billion (0.6% of 2023 GDP) towards humanitarian aid and reconstruction. In addition, the Central Bank of the Republic of Türkiye further cut its main interest rate from 9% to 8.5% to cushion the economic impact of the earthquake. It also granted some exemptions from the banks' reserve holding obligations to encourage loans to the earthquake-hit zone. The central bank is expected to hold its policy rate at 8.5% over the projection period.
Growth will remain solid but there are significant risks
Despite the negative impact of the earthquake, the economy will grow at 3.6% in 2023 as the reconstruction effort and fiscal support will largely offset the negative impact on production and supply chain disruptions. In addition to public transfers and public investment, business and residential investment will increase as firms and households repair or replace damaged equipment and buildings. Private consumption will be supported by a minimum wage rise of 50% and fiscal support. Export growth will slow in 2023, but gain traction in 2024 as global demand strengthens. Inflation will remain high through 2023 owing to expansionary monetary policy and high wage growth. Risks are tilted to the downside. Large external financing needs and rapidly declining reserve buffers leave the economy highly vulnerable to turbulence and headwinds.
Macroeconomic and structural policies need reform
The government should continue to provide necessary support to those affected by the earthquake and those lower-income households suffering from rising living costs. This support is warranted but should be temporary and targeted to the most vulnerable to keep fiscal costs manageable. At the same time, more balanced and sustainable growth requires a more transparent and robust macroeconomic policy framework. Anchoring inflation expectations is a key challenge. Monetary policy should be tightened with carefully timed policy rate increases accompanied by clear communication about future moves. Confidence in the independence of the central bank needs to improve, including by reducing the turnover of the Bank’s board. Structural weaknesses stemming from competition policy and business regulation related to complex and burdensome administrative procedures to obtain permits, licences or concessions, hamper the creation of formal businesses. Labour market regulations also need to be further improved to support the creation of more and higher-quality jobs. In addition, there remains scope to increase labour supply, including well-designed hiring subsidies targeted at the most vulnerable groups. Increasing and broadening the provision of quality early childhood education and care can help to improve access of women to the labour market.