Treasury and Finance Minister Mehmet Şimşek on Sunday reiterated the government’s confidence that Türkiye’s inflation would continue to decline steadily in the coming months.
Şimşek acknowledged that inflation remains the most significant macroeconomic challenge but stressed Türkiye is “in a phase of a permanent and significant decrease.”
Annual inflation dipped below 52% in August, compared to its peak of 75% this May. The sharp drop is expected to continue as more than a year-long monetary and fiscal tightening campaign brings price relief.
The central bank sees it easing to 38% by year-end, compared to the government’s forecasts of around 42%.
Şimşek said inflation is likely to approach the government’s projection, which is also the central bank’s upper forecast.
“The downward trend will continue in the coming months, and we expect to close the year with an inflation rate of around 40%. Next year, we aim for below 20% and the following year, below 10%,” Şimşek told a meeting with businesspeople in northwestern Karabük province.
“To support the decline in inflation, we must maintain budget discipline,” he noted.
Şimşek acknowledged the significant budget deficits caused by last year’s earthquakes, targeting a reduction of this gap to around 3% of national income next year.
He also emphasized the government’s intention to solidify the foundations of Türkiye’s growth through the Medium-Term Program (MTP).
Noting some may claim that growth is slowing, Şimşek reassured that this is a temporary situation, as efforts are being made to establish a higher and sustainable growth trajectory.
Looking back over the last 20 years, he noted that Türkiye’s current account deficit averaged 3.8% of GDP. This year, he said, the government successfully reduced it to 1.7% and projected it would remain between 1% and 2% over the next three years.
“This level of current account deficit is manageable as it allows us to decrease our external debt-to-GDP ratio and build reserves. Thus, we foresee no problems with a sustainable current account deficit this year and in the years to come,” he added.
Restoring investment-grade rating
Şimşek highlighted that Türkiye’s total reserves had increased from around $98.5 billion last year to $156 billion.
He stressed that they managed to increase net reserves, excluding swaps, by $90 billion over the last 12 months. “The issue of reserves is no longer a source of concern. Currently, Türkiye’s net reserves, excluding swaps, are approximately $30 billion,” he noted.
Şimşek also addressed the decline in the foreign exchange-protected deposit scheme, which he says has decreased by approximately $98 billion over the past year.
The scheme, known as KKM, has weighed heavily on the budget, and authorities have been seeking to phase it out gradually. Under the scheme, adopted in late 2021 to help reverse dollarization and support the Turkish lira, the central bank protects deposits from depreciation.
“As of early September, the KKM balance dropped from $144 billion to $46 billion. We anticipate further declines in the coming months without disrupting the markets,” said Şimşek.
The share of the lira in total deposits has risen from around 32% last year to approximately 53%, which Şimşek described as a “remarkable” success, reflecting increased confidence in the currency among citizens and international actors.
Şimşek reiterated the government’s commitment to restore Türkiye’s credit rating to an investment-grade level, which was lost following the failed coup attempt in 2016.
The policy reversal since last June helped Türkiye become the only country to secure upgrades from the world’s three leading credit agencies – Fitch Ratings, Moody’s and S&P Global – this year.
Şimşek expressed confidence that, as long as they continue with the MTP, agencies will keep upgrading their ratings. “We are determined to restore Türkiye’s investment-grade rating, and it looks like it will happen much faster this time.”
