The decline in inflation in Türkiye is set to continue this year, Treasury and Finance Minister Mehmet Şimşek said Wednesday, highlighting the disinflation process would not only be supported by demand-side policies but also by supply-side measures in food, housing and energy as well as accelerated reforms.
The minister delivered these remarks at the Türkiye Conference, which was hosted by Bank of America in London, where he engaged with some 250 investors.
At the event, Şimşek made a comprehensive presentation on the general outlook of the Turkish economy and explained the main policy priorities and structural transformation targets.
Inflation will continue to decline due to the lagged impact of monetary policy, more supportive revenue policy, administered prices in line with the inflation target and supply-side measures, Şimşek told investors, according to an Anadolu Agency (AA) report.
"This year, we will reduce the budget deficit to around 3% of gross domestic product (GDP). This target will be met thanks to the reduction in public expenditures," he said.
Şimşek also said that the lump-sum tax on fuel, tobacco products and alcoholic beverages is being updated with the domestic producer price index (D-PPI) for the last six months.
He noted that the rate of increase in the special consumption tax (ÖTV) on fuel was limited to 6%, below the six-month D-PPI.
"The impact of this regulation on the average sale prices is around 1.4%, meaning that we are sacrificing TL 12 billion ($338.4 million) in tax revenues, while the impact of the D-PPI revisions on tobacco and alcoholic beverages will be well below the year-end inflation target," he said.
"The weight of services, updated with the revaluation, is only 0.36% in the CPI (consumer prices index) basket," he added.
The disinflation process will not only be supported by demand-side policies but also by supply-side measures in food, housing and energy, and they will accelerate reforms, according to Şimşek.
Explaining the steps to be taken in the disinflation process, he said: "We will support disinflation not only with demand-side policies but also with supply-side measures in many areas such as food, housing and energy, and we will accelerate reforms in these areas. We will continue our support in the fields of irrigation projects, land consolidation, food supply chain and food logistics to increase food supply."
Türkiye's annual inflation eased to 44.38% in December from a peak of around 75.5% in May last year, official data showed earlier this month.
The reconstruction of the earthquake-hit areas zone, increasing the supply of social housing and urban transformation will be among the main elements of supply-side policies, Şimşek further pointed out.
"We will carry out the energy transformation by prioritizing both domestic and renewable resources," he added.
The normalization of gold imports and the decrease in energy imports played an important role in lowering the current account deficit, the minister also said, noting that the decline in the current account deficit reduces the need for external financing.
“We expect the decline in gross external financing requirement to continue for the next three years and we aim to become a net external debt payer in the Treasury's eurobond issues starting next year,” Şimşek said.
Furthermore, stating that the growth outlook in one of Türkiye's main trade partners is expected to improve this year, Şimşek said: "We managed to increase our market share even during periods when imports in Europe decreased. Therefore, the economic recovery in Europe can offer important opportunities to our country with our increasing market share."
He also emphasized the importance of increasing total factor productivity and said they aimed to increase productivity "by encouraging structural reforms, integration in trade, and investments."
"We aim to increase productivity by promoting structural reforms, trade integrations, efforts in digital and green transformation, and investments in infrastructure," he said.
The minister underlined that Türkiye shows resilience against increasing geopolitical tensions and protectionist tendencies as global defense spending reached historic highs.
"Our diplomatic missions, role in global affairs, refugee policies and pioneering position in humanitarian aid go on to show Türkiye's soft power and at a time of rising protectionism, our free trade agreements with 54 countries, including the EU, demonstrate our resilience against trade fragmentation," he said.
"Türkiye is a strong player in the construction and contracting sectors worldwide and we can play key roles in the reconstruction of Ukraine, Libya, Yemen, Gaza and Syria once peace is restored in these regions," he added.
At the same time, the governor of the Turkish central bank also delivered a presentation in London on Jan. 15, highlighting similarly that "inflation is coming down."
The Governor of the Central Bank of the Republic of Türkiye (CBRT), Fatih Karahan, told investors that "services inflation is easing" while the rent inflation was also on a "downward trend."
According to the presentation shared by the bank, the governor also highlighted that the pricing behavior of firms in the industrial sector is improving while suggesting that corporate inflation expectations are also improving and the "household inflation expectations started to improve as well."
The graph shared by the CBRT showed an improvement related to inflation expectations of households when looking 12 months ahead, depicting lower anticipations from September 2024 onward.
Commenting on the imports of consumer goods, Karahan said that they "remain moderate," excluding jewelry.
He also noted that the composition of growth "is shifting towards net exports," while the share of Turkish lira in total deposits continues to increase and the volume of FX-protected accounts continues to decline.
The governor concluded that reserve adequacy "has considerably improved," pointing to the increase of $111.3 billion in net reserves between the end of March last year and Jan. 3 this year.