Turkey diverges from key inflation goal in new economic programme

Turkey’s government has diverged from a key goal of slowing double-digit inflation to 5 percent in a new three-year economic programme released at the weekend.

Turkish President Recep Tayyip Erdoğan’s government, with an eye on elections in two years, is now predicting inflation of 8 percent by 2023, up from 4.9 percent in its previous programme published in October last year. Its estimate for 2024 stands at 7.6 percent.

Investors in Turkey are concerned that Erdoğan’s government is not sufficiently focused on tackling high inflation in the country, which accelerated to 19.25 percent in August, exceeding the central bank’s benchmark interest rate of 19 percent. The bank has sought to reassure them, pledging to slow inflation - the highest in major emerging markets outside of crisis-hit Argentina - to a long-standing medium-term target of 5 percent by 2023. It last met that goal more than a decade ago.

Erdoğan’s government also raised the target for annual price increases this year to 16.2 percent, more than double its goal of 8 percent in the previous programme. The central bank’s year-end estimate for inflation stands at 14.1 percent.

The government also predicted annual inflation of 9.8 percent for 2022, higher than the 6 percent it estimated in October 2020. The central bank’s forecast stands at 7.8 percent.

Inflation in Turkey has accelerated sharply as Erdoğan’s government flooded the economy with cheap loans from state-run banks last year to bolster economic growth and urged the central bank to keep interest rates at below inflation to underpin a borrowing boom. Erdoğan has called for rate cuts this year even as inflation accelerated and investors demanded hikes.

The government now foresees economic growth of 9 percent this year, 5 percent in 2022 and 5.5 percent in 2023 and 2024.

Erdoğan is suffering from a slide in popularity ahead of 2023’s presidential elections, partly due to the impact of the COVID-19 pandemic on the economy and a slide in the value of the lira, which has hit successive record lows since a currency crisis in 2018.

The president’s job approval rating among voters fell to 47.9 percent in August, the lowest level since the outbreak of the virus, from 50.6 percent in July and 52 percent in June, according to a nationwide survey by local polling firm Metropoll.

Erdoğan is now extending his pro-growth economic policies to help bolster his popularity, drawing the criticism of some economists, who say the goals are not sustainable without structural reforms. The central bank has backed the moves, keeping its benchmark interest rate unchanged at 19 percent since March even as price pressures increased.

Turkey posted record annual economic growth of 21.7 percent in the second quarter of the year. It followed a sharp contraction a year earlier due to the COVID-19 pandemic.