Inflation that is approaching 10 percent seriously threatens the growth potential of Turkey’s economy, Deputy Prime Minister Mehmet Şimşek said on Thursday, citing the dangers of weakness in the lira and climbing food prices.
His comments — which included calls for structural reform to rein in spiking prices — may do little to assuage investor concerns, after President Recep Tayyip Erdoğan in a separate speech vowed to continue his campaign against high interest rates. Investors see inflation, which touched 9.58 percent year-on-year last month, as Turkey’s most pressing economic problem. Yet the central bank has refused to hike rates, raising concerns it is bending to political pressure from Erdoğan. “We are facing a picture here where inflation nears 10 percent, this is a serious threat because it pulls down our growth potential,” Şimşek, the government’s economy czar, said at a Turkish Industrialists and Businessmen’s Association (TÜSİAD) meeting in İstanbul.
“The biggest factors on inflation are lira depreciation and food prices. To achieve a permanent fall in inflation we must bring down costs and boost supply through structural reforms,” Şimşek said. Turkey’s economy grew at around 4.2 percent in 2015, the World Bank announced last month, and Şimşek has said the economy could “comfortably” grow at 4.5 percent this year.
Erdoğan reiterates belief high interest rates cause inflation
High interest rates cause inflation and those calling for high rates “are the enemies of employment and investment,” Erdoğan said in a speech in Ankara also on Thursday, reiterating earlier similar statements on the issue.
“I am sensitive on the interest rates issue and will continue warning the related institutions on this,” Erdoğan told businesspeople on Thursday in Ankara. Analysts and economists have repeatedly said Turkey needs structural changes to help boost labor productivity and overhaul a food supply chain riddled with costly middlemen. In the nearer term, investors say a rate hike would go a long way in restoring confidence in the battered lira currency, which remains not far off a record low.
Lower oil prices drive Turkish CAD down in 2015
Turkey’s current account deficit (CAD) narrowed to $32.19 billion in 2015 from $43.55 billion, helped by lower energy bills, central bank data showed on Thursday.
This was the smallest trade deficit that Turkey has recorded in six years. The improvement in the current-account gap was due to the fall in global oil prices. Turkey paid $17.1 billion less on oil imports in 2015 ($37.8 billion) than in 2014 ($54.9 billion), Thursday’s data revealed.
Turkey’s central bank also said on Thursday the country’s CAD in December narrowed to $5.073 billion. The improvement in CAD was also seen in Turkey’s trade gap. Turkish imports plunged by 17.5 percent to $18 billion in December while exports fell 11 percent to $11.8 billion year-on-year in the same month. The central bank data also showed foreign direct investment (FDI) in Turkey and tourism revenues fell in 2015. Meanwhile, the amount of unregistered money, the origin of which is unknown, that entered Turkish markets in 2015 skyrocketed to $9.66 billion from $1.56 billion a year ago, the central bank said on Thursday. The new data adds to concerns over the risk of volatility in financing Turkey’s balance of payments due to the increased inflow of unexplained funds.