Türkiye’s medium-term program has faced temporary internal and external shocks that have had a short-term negative impact, but the government has managed to keep the road map on track, Treasury and Finance Minister Mehmet Şimşek said Wednesday.
“Türkiye kept the program on track because we prioritized its implementation with determination,” Şimşek told an interview with private broadcaster A Haber. “During a period marked by both external and internal shocks, our response was the right one, which is why inflation continues to decline today.”
Despite ups and downs, Şimşek suggests Türkiye is firmly on a disinflationary path.
“Almost everything that could have gone wrong happened this year: drought, frost, war in our region, Trump’s trade wars, and even uncertainty caused by an ongoing domestic court case,” he said.
“Yet despite all these headwinds, we believe headline inflation will drop below 30% by year-end. Next year, our target is below 20%,” he said.
Last week’s official data showed annual inflation dropped to below 33% in August, though food and services prices continue to pressure prices.
The government’s newly updated medium-term program expects inflation to slow to 28.5% this year and to 16% in 2026 before dropping to single digits the following year.
The country’s central bank estimates it will fall to about 24% by the end of 2025, with a forecast range of 25%-29%. Policymakers are aiming to cut it to 16% by the end of next year and 9% by end-2027, according to the central bank estimates.
Şimşek highlighted that the program’s first phase, aimed at restoring macro-financial stability, had already been achieved through reserve accumulation and bringing both the budget deficit and the current account deficit under control.
The economy is now in the second phase, focused on disinflation and resilience-building.
“We are reducing inflation and re-establishing fiscal discipline. We’ve ensured structural improvement in the current account and strengthened reserve adequacy,” Şimşek said.
“By the end of this year, we expect the budget deficit to be around 3.5% of GDP and the current account deficit below 1.5%,” he explained.
“Growth is proceeding at a reasonable pace, and unemployment stands at around 8%-8.5%.”
He added that a third stage, beginning in 2026 and running through the first half of 2027, will focus on structural reforms and transitioning into a low-inflation ecosystem
Inflation fight ‘not easy’
Şimşek acknowledged that curbing price growth remains one of Türkiye’s toughest challenges.
“Fighting inflation is not easy,” he said. “Our citizens want to see swift success in the fight against the cost of living. I respect criticism.”
He said headline inflation has eased compared to 50% in August last year and core goods inflation has fallen below 20%.
“So why is overall inflation still above 30%? Because we lifted previous applications on certain categories, such as housing rents and education. There is an ongoing adjustment process linked to past practices,” Şimşek said.
While rents rose 74% and education costs surged 61% in August, Şimşek suggested that these trends would also normalize. Food inflation, meanwhile, has been pressured by drought, pushing it back above 30%, he added.
Şimşek said the below 20% forecast for next year implies goods inflation falling to around 10% and services inflation dropping below 30%.
“We are already experiencing a noticeable decline in inflation. Everyone can see that price tags are no longer being updated as frequently as before,” he said.
The central bank cited a slowdown in the underlying trend of inflation as it cut its benchmark policy rate for the second consecutive month last week. The one-week repo rate was lowered by 250 basis points to 40.5%, following a 300-basis-point cut in July.
The CBRT had raised its policy rate to 46% in April amid market volatility following the arrest of Istanbul Mayor Ekrem Imamoğlu on graft charges. Before that, the bank had begun a gradual easing cycle in December as inflation retreated from a peak of 75% in May 2024.
Risk premium at 5-year low
Meanwhile, Türkiye’s five-year credit default swap (CDS) – a form of insurance for bondholders – on Wednesday dropped to 244 basis points, its lowest level since February 2020.
During the last year, it hovered between 242 and 370 points, while it saw an 840-point level in 2022.
“Had it not been for the problems, we might have been below 200,” Şimşek said.
The minister stressed that fiscal discipline remains a cornerstone of the government’s policy.
The budget deficit averaged 2.4% of GDP over 20 years before the devastating early 2023 earthquakes, which pushed it above 5%, according to Şimşek. The figure could have been much higher had the government not taken measures, he added.
According to officials, the government has spent about $90 billion so far to help rebuild 11 southeastern provinces struck by the disaster.
The budget deficit dropped to 4.7% of GDP in 2024, while the government expects it to be around 3.5%-3.6% this year.
“We’ve established such strong discipline in budget spending that we’re currently below our targets. In other words, we did not allow excessive expenditures; there has been no deviation in spending,” said Şimşek.
Current account, exports
The minister emphasized that the current account deficit is no longer a major concern and said Türkiye has no problems with reserve adequacy or access to external finance.
The current account deficit stood at 0.8% of GDP last year. This year, the target was 2%, but Şimşek says they’ll close 2025 at around 1.5%. “We are progressing better than expected,” he noted.
“We’ve removed the current account deficit as a source of concern,” he said.
“In fact, over the next three years, excluding net gold imports, the deficit will remain below 0.5% of GDP. We are structurally transforming the current account into a non-issue; there is clear structural improvement.”
Şimşek also rejected claims that Türkiye’s competitiveness had eroded, noting that the country’s share in EU imports has risen from 3.3% to 4% since the start of the medium-term program in mid-2023, despite weak European demand.
“Recently, our main trading partners have grown by around 1.8%. Since the start of the program, our exports have increased by approximately 6%,” he said.
“In the decade prior to the program, the European Union grew by 1.5% annually, with its imports rising by 3.3%. During the program period, the EU’s growth slowed to 0.8%, and its imports contracted by 2.2%,” he added.
“Contrary to claims, there has been no permanent loss in our competitive strength. While some sectors are under pressure, others remain highly competitive. We are actively supporting those that are struggling.”
Şimşek said the government is also looking at measures to prevent abuse in bankruptcy protection (concordat) cases.
“We have received complaints of firms misusing the concordat mechanism. We’ve discussed the issue with the Justice Ministry and are evaluating it through a joint working group. We’re looking into how to prevent such abuses and whether commercial receivables can be better protected,” he said.
Şimşek also acknowledged previous challenges in accessing finance, but stressed “the worst is behind us.”
“We are now entering a period of steadily improving financial conditions.”