Türkiye to further tighten fiscal policy amid weakening lira

Finance minister emphasizes commitment to sound policies amid sovereign rating upgrade
Türkiye to further tighten fiscal policy amid weakening lira
On Monday, the Turkish lira weakened further, hitting a new record low against the dollar

Türkiye’s finance minister Mehmet Simsek announced on Monday the government’s determination to tighten fiscal policies to support the central bank’s efforts in curbing inflation. Simsek’s remarks came following Fitch Ratings’ decision to upgrade Türkiye’s sovereign rating from “B” to “B+”.  However, despite these measures, Türkiye faces mounting challenges as annual inflation soared to 67 percent in February.

Fiscal tightening

In a statement made on social media platform X, minister Simsek reiterated Türkiye’s commitment to maintaining sound policies and implementing structural reforms. Simsek also reiterated Türkiye’s commitment to achieving price stability as the top priority.

Türkiye’s annual inflation rose to 67 percent in February, way above expectations of around 40 percent by year-end. Commenting on inflation, Simsek stated: “The CBRT is committed to anchoring inflation expectations using all the tools at its disposal. We will continue to tighten fiscal policy to help the CBRT reduce inflation.”

In his statement, Simsek added that growth rebalancing in Türkiye is underway with domestic consumption moderating and net exports strengthening. Moreover, the current account deficit is narrowing more rapidly than expected. It is on track to fall well below 3 percent of the gross domestic product (GDP) this year.

Lira depreciation

On Monday, the Turkish lira weakened further, hitting a new record low of TRY 32 against the dollar. This marks an approximate 8 percent decline since the beginning of the year. Despite this, Fitch Ratings raised Türkiye’s sovereign rating from “B” to “B+” last Friday, citing the government’s tightened monetary policies as effective in combatting inflationary pressures.

Following President Recep Tayyip Erdogan’s re-election in May, Türkiye shifted from a low-interest-rate policy to a more restrictive approach, substantially raising its key interest rate to 45 percent from 8.5 percent since June. This move reflects a strategic approach towards curbing inflation and stabilizing the economy.

Read: Egypt’s inflation unexpectedly surges to 35.7 percent in February amid currency flotation

Challenges ahead

With local elections scheduled for March 31, experts expect Türkiye to undertake further policy measures to alleviate inflationary pressures. This could potentially lead to additional economic hardships for citizens grappling with soaring prices.

“Achieving price stability takes time. Post local elections this month, Türkiye will have a long period without elections to pursue the medium-term program, which also includes reforms that will boost productivity and enhance competitiveness,” Simsek added.

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