Turkey sees 9% Growth in 2021, inflation to ease by end-2022

Turkey sees its economy expanding 9% this year and is optimistic that inflation will ease by the end of 2021, according to the country’s newly unveiled three-year economic program in which it sets out its outlook for the economy.

The annual inflation rate is expected to ease to 16.2% by the end of the year and hit 9.8% by the end of 2022, as stated by the government’s forecasts published on Sunday.

The economy is expected to grow by 9% this year before settling at about 5% growth next year, in line with outside forecasts, according to the program published in the country’s Official Gazette.

The program foresees annual inflation falling further to 8% in 2023 and 7.6% in 2024. The gross domestic product (GDP) growth is seen at 5.5% in both 2023 and 2024.

Treasury and Finance Minister Lütfi Elvan, commenting on the program, said “we will further strengthen macroeconomic stability for durable growth led by the private sector.”

Annual inflation stood at 19.25% in August and is expected to fall by the end of this year with the base effect, a decline in the accumulated impact of exchange rate developments, and a correction in food prices, the program said.

The central bank – which has a 19% benchmark interest rate – said in July that inflation should fall even more rapidly to 14.1% by the year’s end and to 7.8% by the end of 2022.

The government said price pressures should ease this year due to base effects, import-price relief as Turkish lira depreciation ebbs, and a reversal of soaring food prices.

The inflation projection leaves the country’s central bank with less room for a possible monetary easing this year. It has held its policy rate unchanged since March and repeatedly promised in recent months to keep it above the inflation rate.

Annual inflation had stood at 18.95% in July and 17.53% in June, and has been in double digits for most of the last four years.

The August jump pushed the Central Bank of the Republic of Turkey’s (CBRT) benchmark interest rate adjusted for price growth into negative territory for the first time since October.

Demand to balance

The government said domestic and foreign demand should balance through year-end even as economic growth slows from the robust performance recorded in the second quarter, which reflected a rebound from the initial pandemic fallout.

Turkey’s relatively rapid vaccine rollout, a rebound in tourism and exports should boost growth, it said.

Turkey’s economy grew 21.7% year-on-year in the second quarter, official data showed last week, rebounding after a sharp slowdown a year earlier driven by COVID-19 restrictions.

Among others, the current account deficit to GDP ratio is projected to be 2.2% next year before it narrows to 1.5% in 2023 and 1% in 2024.

The GDP per capita is expected to surpass $11,000 (TL 91,256) by 2024, according to the program. The figure is aimed to stand at $9,947 in 2022, $10,703 in 2023 and $11,465 in 2024.

The government is aiming for the GDP to exceed $850 billion in 2022, before hitting $975 billion in 2023 and topping $1 trillion in 2024.

The GDP with current prices is projected to be around $801 billion this year, while it stood at $717 billion in 2020, according to the Turkish Statistical Institute (TurkStat).

The U.S. dollar/Turkish lira exchange rate will be around 8.30 by the end of this year and increase to 9.27 in 2022, 9.77 in 2023, and 10.26 in 2024, according to the program.

The country’s exports target is $230.9 billion for 2022 and grows to $255 billion by 2024.

The budget deficit, which has widened due to the impact of the coronavirus pandemic, is projected to increase in the coming few years. It is expected to be TL 230 billion ($27.7 billion) this year, with a target of TL 278.4 billion for 2022, TL 290.2 billion in 2023, and TL 294 billion in 2024.

The government sees the budget gap to GDP ratio at 3.5% in 2021 and 2022 before it drops to 3.2% in 2023

The unemployment rate, which stood at 10.6% in June, is projected to hit 12.6% by the end of this year, according to the estimates.

The government aims to bring it down to 12% next year, 11.4% in 2023, and 10.9% in 2024.

The program also predicted that banks’ non-performing loans ratio will rise after forbearance measures expire, expected at the end of September. The sector will manage these risks with strong capital, it added.

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