ANKARA: The World Bank unveiled a new $18 billion loan package for Turkey in what appears to be a show of support for the government’s efforts to reshape its economic policy.
The deal, which comes in addition to a $17 billion loan the bank signed earlier in the year, was announced just a day after President Recep Tayyip Erdogan and Vice President Cevdet Yilmaz presented their medium-term plan, which included inflation targets. Employment and economic growth for the period 2024-2026.
It is expected that two-thirds of the new loan will be channeled towards the private sector in the form of direct investments and guarantees. The remainder will help fund public sector activities, including the large-scale reconstruction work needed after the devastating earthquakes that hit the southwest of the country in February.
Turkey has a strong potential to rise once it adopts the right policies to address macroeconomic imbalances.
Silva Demiralpprofessor of economics
In an interview with the state-run Anadolu news agency, Humberto Lopez, the World Bank’s country director for Turkey, praised the government’s efforts to restore macroeconomic stability.
He said, “We believe that the monetary policy tightening implemented by the Central Bank, the dismantling of distorted financial regulations, and fiscal revenue measures to reduce fiscal deficits pursued by the Ministry of Finance are steps in the right direction.”
“In addition to our ongoing $17 billion program, $18 billion in new operations will be prepared and presented to the World Bank Group Board of Directors in the next three years.
“Taking into account all financing instruments, this amounts to a temporary total fiscal package of approximately $35 billion.”
Amid the ongoing economic crisis, the appointment of former Merrill Lynch economist Mehmet Simsek as finance minister and former Goldman Sachs banker Hafiz Cay Erkan as central bank governor after the May elections was seen as evidence of Turkey’s determination to return to a more traditional monetary policy. . The $17 billion loan package was approved before this survey was conducted.
Timothy Ash, a London-based strategist at Bluebay Asset Management, said the timing of the new deal indicated Turkey’s improving relations with its Western allies, which would have influenced the bank’s decision.
“Now we have to watch other multilateral development banks and international financial institutions follow suit and increase their exposure,” he told Arab News.
He said the deal was a “vote of confidence” for Simsek, Erkan, and their more traditional policies.
In the recently unveiled economic roadmap, Turkey aims to become a high-income country, with a gross domestic product exceeding $1.3 trillion and a per capita national income of $14,855, by 2026.
The new medium-term economic plan includes reforms in public finance, trade, the investment environment, employment, human capital, and disaster management. Simsek said that Erdogan was behind the entire program.
However, experts such as Wolfango Piccoli, co-chairman of London-based Teneo Intelligence, said that while the World Bank loan agreement was meaningful, it was “nowhere close to a potential standby agreement” with the IMF.
“Regardless of the size of the package offered by the World Bank, reaching an agreement with the International Monetary Fund would greatly boost investor confidence in Turkey,” he told Arab News.
Piccoli said the IMF deal would also add transparency to the country’s public finances, including guarantees from the Treasury for PPP projects, and would require reforms to the agenda that were politically unpalatable to the government.
“The World Bank’s $18 billion in loans can’t do anything like that. I think most of the money will be used for the reconstruction of the earthquake-damaged areas.”
“It’s good news for Turkish companies who may be able to get loans and guarantees from the World Bank, but for foreign investors, this package is unlikely to make a difference.”
Silva Demiralp, professor of economics at Koc University in Istanbul, said the World Bank agreement appeared to be a show of support for Turkey’s post-election economic plans.
He told Arab News that Turkey “has a strong potential for recovery once it adopts the right policies to address its macroeconomic imbalances.”
Clearly abandoning the policies implemented prior to the elections is a strong step in the right direction. (However,) I have questions regarding the sustainability of the program put in place by the OVP (Medium Term Economic Program).
“The World Bank seems more convinced. Then again, we’re not in the investor meetings…so I can’t tell what would be different this time just by looking at the OVP.
“Talking to politicians directly may provide a clearer picture of what is hidden in the mid-term targets laid out in the programme. It is true that the internal consistency of the OVP has improved a lot. However, the document is notorious for not achieving its objectives.
“Growth targets look ambitious if, for example, the downward trend in inflation continues,” Demiralp said.
This may be possible with large capital inflows, and the World Bank loan could be an important step in this direction. But this alone will not be enough, given that the losses from the earthquake itself are close to $100 billion.
Meanwhile, leaders of the world’s largest economies, including Turkey and Saudi Arabia, gathered in India on Friday for the two-day G20 summit.
The Turkish government expected the inflation rate to reach 65 percent by the end of the year, before falling to 33 percent in 2024. It also lowered its forecast for economic growth to 4.4 percent for this year and 4 percent in 2024. The country’s current account deficit is expected to decrease. It reaches $42.5 billion this year and $34.7 billion in 2024.
In June, the central bank raised interest rates to 25 percent, from 8.5 percent, in a bid to calm inflation, which rose to 58.9 percent last month.
The Turkish lira remained weak today, Friday, at about 26.8 per US dollar, down from 18 per dollar at the same time last year.
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