Türkiye's disinflation process has been successful but is moving more slowly than desired, Treasury and Finance Minister Mehmet Şimşek said Wednesday, attributing the slowdown to a range of domestic and external factors.

"If there had been no war this year, inflation would be at least 7 percentage points lower as of today," Şimşek told the private broadcaster Bloomberg HT.

He added that the conflict had affected not only oil and natural gas prices but also commodity prices more broadly, creating stronger pressure in Türkiye because the country's inflation rate remained relatively high.

The annual consumer price index (CPI) in Türkiye eased for the third consecutive month in August to 31.5%, from 31.8% in July, while monthly inflation was 1.84%.

The downward trend that started in mid-2024 had stalled this year following a sharp rise in energy prices caused by the Iran war.

Inflation inertia remains challenge

Şimşek said inflation had shown more persistence than the government's economic model had anticipated, citing strong backward indexation in rents, education and wages.

He said exchange-rate pass-through in Türkiye was between 30% and 40%.

"There is no change in the direction or framework of our policies," Şimşek said, adding that the government's targets were largely on track.

Earlier this month, the government unveiled an updated Medium-Term Program (MTP), which projects a year-end inflation of 28.4%, compared to 16% estimated last year.

Officials said the war in the Middle East had played a key role in the upward revision.

Inflation is projected to fall to 21% next year, 13.5% in 2028 and 9% in 2029, according to the MTP.

Şimşek said disinflation does not mean prices are falling, but that the pace of price increases is slowing.

Şimşek said monetary policy had been more effective in reducing core goods inflation. Services inflation had also begun to respond, although it had initially shown considerable inertia, he added.

Without the war, year-end inflation would have been around 21% to 22%, Şimşek said, adding that the timeline initially envisaged by the government could be extended somewhat.

"Cost-of-living pressures are our biggest priority," he said, adding that the government would not abandon disinflation during the election process because it was necessary for sustainable growth.

The next elections in Türkiye are scheduled for May 2028.

Authorities have been pursuing tight monetary and fiscal policies to balance domestic demand and combat high inflation, putting pressure on economic growth.

The Central Bank of the Republic of Türkiye (CBRT) has kept its benchmark policy rate at 37% in the last four policy meetings as ⁠it monitors Iran war fallout.

Fiscal targets remain on track

Şimşek said the Medium-Term Program had two main functions: serving as a binding policy commitment for the government, particularly in budgetary terms, and providing a road map for the private sector.

He said the government had maintained its policy framework for three years and had performed better than its target for the budget deficit as a share of gross domestic product.

Türkiye this year launched a sliding-scale tax adjustment system, implemented to limit the impact of rising oil prices and inflation on ⁠consumers. Authorities last month removed diesel from ⁠the system, while gasoline and liquefied petroleum gas (LPG) will remain until Oct. 1, when the mechanism is ⁠set to be abolished.

The government gave up significant tax revenue with the system, said Şimşek. Despite this, the government expects the budget deficit to reach 3.1% of GDP, compared with a target of 3.5%, he added.

Türkiye had removed a special consumption tax on diesel until the end of August and reinstated it this month. The tax will rise incrementally by TL 3 each month until it reaches about TL 13.1 per liter on Jan. 1, the same level as before the removal.

Şimşek said the government had achieved many of its targets under the Medium-Term Program, including the gradual exit from foreign-exchange-protected deposits. He also said reserves were no longer a major concern and that growth remained moderate but reasonable compared with the global economy.

Flexible exchange rate regime not currently possible

Şimşek said Türkiye's normal preference was a floating exchange rate regime, but current market conditions did not allow for a more flexible approach.

He said sustained demand for the Turkish lira could lead to excessive appreciation if the currency were left entirely to market forces, while intervention could create pressure in the opposite direction.

"A more flexible exchange-rate regime could be considered once inflation reaches single digits," Şimşek said, adding that current conditions did not permit such a move.

He warned against reducing all economic discussions to the exchange rate, saying the government would pursue a comprehensive approach focused on reforms and productivity.

Türkiye does not face a problem securing raw materials, he said, but energy markets remained highly sensitive, particularly for oil and natural gas derivatives.

New support for manufacturers

Şimşek said access to finance remained a key issue for the real sector and that the government was providing substantial targeted support while taking competitiveness into account.

The average interest rate on loans provided to farmers is 12%, he said, adding that the government covers 70% of the interest cost for nearly 1 million farmers.

The government has also increased rediscount loans and provided significant export-related support to manufacturers, Şimşek said.

The capital of Türkiye's Eximbank has been increased sevenfold, allowing it to provide $60 billion in loans this year, he added.

Since the end of 2023, the government has identified 284 products eligible for investment support. Companies producing these products can access investment loans with maturities of up to 10 years and a total planned size of TL 750 billion, Şimşek said.

He also said monthly wage support of nearly TL 5,000 per employee was being provided in several sectors.

The government will introduce working-capital support for the manufacturing industry, beginning with TL 250 billion this year and potentially increasing the amount later, Şimşek said.

He added that targeted policies were being used to ease pressure on the real sector without undermining the broader monetary-policy framework.

No election economy

Şimşek rejected claims that the government would adopt an election-driven economic policy.

"Those who say we will implement an election economy have either not read the Medium-Term Program or do not understand mathematics," he said.

He added that the government had met its budget targets over the past three years and had often performed better than planned.

The government has largely completed housing projects in the southeastern region struck by devastating earthquakes in early 2023 and plans to build 750,000 social housing units annually over the next few years, Şimşek said.

About TL 250 billion will be allocated for the program in the budget, he added.

Tax revenues expected to rise in 2027

Şimşek said there were no plans for new indirect tax measures beyond efforts related to corporate income tax, personal income tax and balancing the current account.

The number of income taxpayers has increased to 5.5 million as part of the government's campaign against the informal economy, Şimşek said.

Tax revenues are expected to increase in 2027 due to GDP growth, the assumption that the sliding-scale mechanism will not continue and further efforts to combat informality, he added.

Net exports the only drag on growth

Şimşek said growth had slowed relatively in recent years but remained in line with the global economy.

Türkiye is growing 1.5 to two times as fast as its trading partners, he said, adding that the government's economic program had contributed to the slowdown but was designed to ensure more sustainable growth.

Growth is still expected to reach 3.3% this year, according to Şimşek. The economy expanded 2.3% year-over-year in the second quarter, following a 2.6% expansion in the first ⁠three-month period.

The war has been the biggest global shock since the 1970s and has lasted for an extended period, affecting investment decisions, Şimşek said.

External conditions are currently having a significant impact on growth, he added, stressing the importance of balanced, high-quality and sustainable expansion.

"Net exports are the only factor pulling growth down," Şimşek said.