Republic of Türkiye: Staff Concluding Statement of the 2025 Article IV Mission

The authorities’ efforts to reduce inflation while supporting growth have led to gradual disinflation, improved confidence in the lira, and a buildup of buffers. Economic activity has stayed firm, and although risks remain elevated, they have eased compared to last year. Lowering the budget deficit has helped counter inflation, and the Central Bank of the Republic of Türkiye has applied various measures to keep real interest rates high and limit financial risks. However, the slow decline in inflation continues to expose the economy to shocks related to investor sentiment, global risk conditions, or energy prices, creating ongoing challenges for stability.

A more stable and sustainable trajectory requires priority on revenue-based fiscal tightening, stricter monetary policy, and cautious income policies. While these measures may weigh on short-term growth, structural reforms in labor and product markets and legal systems, along with support for vulnerable groups, could help mitigate adjustment costs and enhance both growth potential and inclusion.

Context

Prudent policies have delivered notable gains. The budget deficit is projected to narrow from 4.7 percent of GDP in 2024 to 3.6 percent in 2025 due to continued spending restraint and better tax compliance. Inflation eased from 49 percent in September 2024 to 33 percent in October 2025, and real policy rates have supported confidence in the lira. Growth reached 3.6 percent in the first half of 2025, supported by earthquake reconstruction and wealth effects from high gold prices. The current account deficit stood at 1.7 percent of GDP in the four quarters to 2024:Q2, compared with 1.3 percent in the year to 2025:Q2, and remains well-financed. Gross international reserves reached US$184 billion as of October 31. The financial system has remained stable.

Persistently high inflation continues to pose vulnerabilities and costs. A longer period to reanchor inflation expectations increases the risk of renewed inflation, threatening growth and financial stability. Extended adjustment periods may also lead to reform fatigue and rising inflation expectations, requiring more forceful policy interventions and higher short-term growth costs. High inflation also constrains financial sector deepening and market efficiency, reflected in shorter bank lending maturities and widening profitability gaps between large corporations and SMEs. Income and wealth disparities have widened as inflation and asset price gains have favored higher-income households.

Outlook and Risks

The forecast anticipates a smaller fiscal consolidation in 2026, resulting in a slightly looser policy mix. With continued revenue strength and spending restraint, the deficit is expected at 3.7 percent of GDP, implying a marginally negative cash fiscal impulse. Monetary policy is expected to remain contractionary, with further interest rate reductions but positive real rates supported by easing inflation expectations. Quantitative measures are expected to remain in place. Price and income policies are projected to move broadly in line with CPI inflation. Energy prices are expected to remain stable and external demand relatively subdued.

Near-term growth is projected to remain steady, with inflation continuing to ease gradually. Growth for 2025 is estimated at around 3.5 percent, supported by stronger demand in 2026 as fiscal policy becomes less contractionary and policy rates decline. This is expected to raise growth to 3.7 percent in 2026. Inflation at the end of 2025 is projected at 33 percent, above the central bank’s 24 percent target. Moderate wage growth and diminishing inertia as inflation falls are expected to support further disinflation, but capacity constraints and recent unfavorable inflation outcomes pose challenges. Headline inflation is estimated at 22 percent at end-2026. The current account deficit is projected at about 1.4 percent of GDP in 2025 and around the same level in 2026. Strong depositor confidence and high gold prices would contribute to modest reserve accumulation.

Inflation is expected to remain in double digits, and growth below potential in the medium term. Elevated inflation will continue to weigh on investment and productivity, limiting GDP growth to around 3.7 percent, below pre-GFC trends. Favorable commodity prices and external financial conditions should keep the current account deficit contained, but dollarization is expected to remain high.

Although risks have eased since last year, they remain tilted to the downside. Persistent demand pressures and unanchored inflation expectations heighten vulnerability to shocks, including changes in energy prices, exchange rate movements, or shifts in global risk appetite. Risks also arise from depositor behavior, corporate FX debt rollover challenges, and potential corrections in gold prices. Additional vulnerabilities include geopolitical developments, weaker tourism flows, or slow European growth. Trade risks appear balanced. On the upside, weaker growth could help reduce inflation faster than expected, and rent pressures may have stabilized, supporting a quicker disinflation process.

Putting Türkiye on a Lower-Risk and Higher-Growth Path

Additional policy tightening is needed to align inflation with central bank targets and strengthen resilience. A coordinated move toward stricter fiscal, monetary, and income policies would support confidence and help steer inflation expectations downward. Higher real interest rates, greater exchange rate flexibility, and a more robust social safety net would reinforce stability.

A path toward lower risk and higher growth requires accepting short-term growth costs. Achieving disinflation requires further demand compression, as the required output sacrifice increases as inflation declines. These costs would be offset by reduced vulnerabilities and convergence toward higher pre-pandemic growth levels. Structural reforms would help lower adjustment costs and stimulate productivity growth.

Fiscal Policy

Continued fiscal consolidation is necessary to accelerate disinflation and reduce risks. Measures above the baseline equivalent to around 1 percent of GDP in 2026 and 0.6 percent in 2027, supported by lower interest payments, would reduce the deficit to 2.6 percent and 1.8 percent of GDP. These actions would help ease demand pressures and complement tighter monetary and income policies. Key revenue measures include rationalizing corporate tax incentives, simplifying the VAT structure by harmonizing rates, and strengthening compliance through digitalization, auditing, and improved coordination. Spending measures such as phasing out energy subsidies, safeguarding vulnerable households, and limiting non-essential capital spending also have a role. Noninflationary measures should be prioritized, with subsidy and VAT reforms introduced once disinflation is more firmly established. Efforts to reduce pension contributions and improve management of state-owned enterprises and PPPs should continue.

As inflation stabilizes, resources can be redirected toward social objectives. Returning the deficit to the medium-term target of 3 percent of GDP remains appropriate. Lower inflation, reduced interest payments, and higher revenue from planned measures would create about 1 percent of GDP in fiscal space, which could be used to support vulnerable groups. Potential initiatives include targeted cash transfers and adjustments to taxes and subsidies to support higher labor force participation, especially among women.

Monetary and Exchange Rate Policies

Türkiye’s flexible monetary policy framework, which uses the policy rate alongside quantitative tools, has contributed to disinflation while preserving stability. The recent distinction between inflation forecasts and targets has bolstered the nominal anchor. The central bank has acknowledged recent inflation pressures and signaled a more cautious stance to improve predictability.

The use of multiple tools, however, complicates communication and weakens monetary transmission. Substitution into foreign currency, low leverage, and external borrowing options reduce the impact of policy rates. High and persistent services inflation also limits the benefit of currency appreciation. Quantitative tools help but lack transparency and may send mixed signals, complicating expectations and loan pricing.

Meeting inflation targets requires higher real interest rates and an emphasis on the policy rate. A return to mid-2025 policy rate levels and delaying rate cuts until sequential inflation aligns with targets would help. Dedollarization goals and credit ceilings, which weaken transmission and distort bank portfolios, should be phased out before rate reductions. Clear communication on triggers for policy changes would further support expectations. Strengthening central bank independence would improve credibility.

Exchange rate policy should aim to smooth excessive volatility. Intervention has helped contain volatility and respond to shocks, but prolonged currency strength increases the risk of overvaluation. Progress on disinflation would reduce the need for intervention. As reserves improve, greater currency flexibility should be allowed. Reserve accumulation ceilings could mitigate speculative inflows and enhance buffers.

Income Policies

Income policies aligned with disinflation goals would h