Turkey's central bank, alongside other financial institutions, has stepped in with new measures to normalize the country's economy and stabilize the value of the Turkish lira.

Accordingly, the Central Bank of the Republic of Turkey (CBRT) announced Tuesday that it will reduce liquidity limits offered to primary dealers as part of open market operations to zero.

The decision goes into effect on Wednesday, the bank said in a statement.

Enver Erkan, an economist at private investment firm Tera Yatırım, said tightening liquidity conditions would reduce the supply of cheap funding and increase the average Turkish lira value.

"We expect Turkish lira-weighted average interest rates will surpass the bank's policy rate (8.25%) and hit 9.75%," Erkan said, adding that "the move can be seen as a covert rate hike."

Last Friday, the bank decided to cut liquidity limits in half after the U.S. dollar/lira exchange rate hit an all-time high of over 7.30.

The moves came in a bid to both protect the Turkish lira and limit inflation, which could show upward mobility amid the uncertain financial environment caused by the coronavirus crisis.

Turkey’s consumer price inflation, which was a pressing issue for the economy after it surged to a 15-year high of above 25% in October 2018 but briefly touched single digits last fall, thanks largely to a base effect and tight monetary policy, fell to a lower-than-expected 11.76% year-on-year in July, according to data by the Turkish Statistical Institute (TurkStat), reversing two months of rising inflation.

The CBRT last week raised its year-end inflation forecast to 8.9% from 7.4%. It said the 1.5 percentage-point increase was driven by an upward revision in oil prices and food inflation projections.

The bank also raised its forecast for end-2021 inflation to 6.2%, up from a previous forecast of 5.4%.

‘Experienced against shock waves’

The pace of full economic recovery, meanwhile, from the pandemic will depend on normalization steps taken both within the country and abroad, while the Turkish economy has entered a relatively quick recovery period as revealed by the macroeconomic indicators.

On Monday, following a Cabinet meeting in capital Ankara, President Recep Tayyip Erdoğan also commented on the recent economic developments.

"Turkey's economy has been affected, of course, negatively in the short term," Erdoğan said. However, thanks to the measures put in place and the country’s experience with such shock waves, along with strong health infrastructure, the economy had entered a quick pace of recovery.

Erdoğan commented that 2019 was a year of experiencing the rebalancing process in terms of economy and it obtained significant gains regarding the current account balance and in inflation. The inflation, which was at a 25.2 level in October 2018, was reduced to 11.8% last year.

The president pointed out that its recent policies have allowed Turkey to post a new record of more than $180 billion in exports, despite trade wars, escalating global uncertainty and regional instability along with Brexit in 2019.

The upward trend in economic indicators continued in the first months of 2020. Unlike many developed and developing economies, Turkey displayed a high growth performance of 4.5% in the first quarter of the year, Erdoğan noted. The country showed the highest growth performance among G-20 countries and the second-highest growth performance among OECD countries.

"The improvement we expected in economic indicators started in May, and we see that those were further strengthened in June and July," he said.

The Consumer Confidence Index of Turkey reached 60.9 in July following a boost to 54.9 in April. The Real Sector Confidence Index jumped to 99.4 in the same month from 62.3 in April. The Economic Confidence Index, meanwhile, increased from 51.3 in April to 82.2 in July.

Erdoğan stressed that the Purchasing Managers Index (PMI) rose from 33.4 in April to 82.2 in July, reaching its highest level since February 2011.

Noting that the seasonally adjusted manufacturing industry capacity utilization rate increased from 61.9 in April to 70.7 in July, Erdoğan pointed out that the seasonally adjusted industrial confidence indexes, which started to increase again in May, continued to rise in July.

Production-based economy

The return to the normalization in exports, on the other hand, has begun with July when the coronavirus’ impact on global supply chains and trade routes started to ease with measures and efforts by the countries.

Turkey’s exports in July reached the highest level of 2020 as they hit over $15 billion. The figure rose 11.5% month-on-month, hitting the second-highest July figure of all times. The country's imports reached $17.8 billion in July, posting a 7.7% decrease from July 2019.

The import coverage ratio of exports which was 82.6% in June, reached 84.5% in July. The import coverage rate of exports, excluding gold, rose to 93.9%.

Erdoğan underlined that Turkey's economy is now a production-based economy rather than a consumer one which is more integrated into global value chains with export-oriented strong structure.

He underlined that the country would continue to prove its place in global supply chains with high value-added products in the post-pandemic period.