President Recep Tayyip Erdoğan announced the Medium Term Program (MTP), which is the 3-year roadmap of the Turkish economy, yesterday.
This week, the news was on the agenda that the World Bank met with the Turkish government to mobilize an additional $18 billion in support, in addition to its current $17 billion support.
World Bank Turkey Country Director Humberto Lopez answered questions about the Bank’s assessments of Turkey’s economic policies, the World Bank Group’s activities in Turkey and its plans for the coming years.
“Over the past 20 years, Turkey’s economic performance has been very good”
Question: Mr. Lopez, President Erdogan’s administration has implemented various economic measures in the financial and monetary areas in recent weeks. What is the World Bank Group’s view on these measures?
Lopez: Thank you very much for giving the opportunity to meet. I think it’s fair to say that the World Bank welcomes the administration’s efforts to stabilize the economy and address existing macro imbalances. Over the past 20 years, Turkey’s economic performance has been very good, resulting in significant improvements in the population’s standard of living. However, high inflation rates, an overvalued exchange rate, and fiscal pressures from spending needs related to the February 6 earthquakes put this track record at risk. In this context, we believe that the tightening of the monetary policy implemented by the Central Bank, the loosening of distorting fiscal regulations, and the fiscal revenue measures aimed at reducing the fiscal deficit by the Ministry of Treasury and Finance are steps in the right direction. Although it is possible to see an increase in inflation in the short term due to the depreciation of the lira, reducing inflation is of key importance to ensure high growth in the long run.
“The gradual approach being implemented by the Central Bank is appropriate”
Question: Some policy analysts argue that the administration, and especially the Central Bank, should take more decisive action and act more quickly to reduce inflation. What do you think about it?
Lopez: In our view, the cascade approach employed by the Central Bank is appropriate. Given the combination of contradictory policy objectives such as twin deficits, macro imbalances such as negative real interest rates and high inflation, distortions in the foreign exchange and financial sectors, and restoring the exchange rate balance for an overvalued currency against controlling inflation expectations, A cascading approach seems to be the right approach, as it will allow testing how the economy in general responds to the implementation of new policy measures. This view refers not only to interest rate adjustments, but also to efforts to remove distorting macroprudential measures, which are critical to strengthen macro stability and increase the effectiveness of monetary policy interventions. Markets seem to agree with this view, as the country’s risk premium has dropped to the lowest level since September 2021 after the Central Bank’s rate hike announced a few weeks ago, and 5-year CDSs are currently around 370 basis points.
“We stand ready to support the government’s efforts to implement the structural agenda”
Question: At the meeting held yesterday with the participation of President Erdogan and the members of the Economic Coordination Board, the MTP, which is the 3-year roadmap of the Turkish economy, was announced. What are your views on the document in question?
Lopez: I think the OVP offers a broad perspective on the policies that will form the basis of the government’s macroeconomic stabilization efforts. But I also think that in the coming weeks and months the government will need to make some of the announced measures more specific. All I can add from the World Bank Group’s point of view is that we are ready to support the government’s efforts in implementing the structural agenda.
Support to earthquake-affected areas
Question: There are news on the agenda that the World Bank Group has investment programs worth 17 billion dollars in Turkey. Can you elaborate on this issue?
Lopez: Indeed, the World Bank Group has a great program in Turkey that reflects the excellent partnership between the country and our institution. We currently have more than $17 billion in operations under implementation. These include $10.9 billion from the International Bank for Reconstruction and Development (IBRD), the government-run part of the World Bank, $4.7 billion from the International Finance Corporation (IFC), which works with the private sector, and $4.7 billion from the World Bank Group. The Multilateral Investment Guarantee Agency (MIGA), the part that offers guarantees, has a commitment of approximately 2.3 billion dollars. Our program has a wide spectrum focusing on both public and private sector activities and operations, supporting post-earthquake recovery and reconstruction efforts, climate change mitigation and adaptation, sustainable infrastructure, women, youth and vulnerable groups, export and job creation, especially SMEs. It covers access to finance and mobilization of private capital for the private sector, especially the export sector.
Question: A few months ago, the World Bank Group approved some operations to support the recovery after the earthquakes in Turkey. Could you tell us what the World Bank Group is doing about it?
Lopez: The response of the World Bank Group to the 6 February earthquakes is clearly visible in our portfolio. Last June, IBRD approved two $1.45 billion operations to help affected areas rebuild municipal infrastructure, provide health services to the public, rebuild rural housing, and help SMEs recover from natural disaster so that employment levels can be maintained. In July, IFC approved a $600 million operation to fund the financial sector to improve access to credit in these regions so that the private sector and economy can recover quickly. MIGA has also been a part of this effort by providing warranties that helped build a hospital in Gaziantep, built to strict seismic standards and expected to serve 19,000 patients a day. We are also working on the preparation of new operations to help rebuild schools in earthquake-affected areas and support the agricultural sector.
Financial package of approximately 35 billion dollars
Question: Looking to the future, what can you say about the $18 billion that the World Bank reportedly plans to commit in Turkey? What can we expect from the Bank? How will the World Bank accompany Turkey in the coming months?
Lopez: Indeed, we are determined to accompany Turkey in the implementation of policies that will stabilize the economy. In addition to our ongoing $17 billion program, we anticipate preparing and presenting $18 billion of new operations to the World Bank Group Board over the next three years. This amount includes direct loans to the government and support to the private sector. Support for the Turkish private sector could be as much as two-thirds through the mobilization of direct investment, guarantees and around $5 billion in trade finance. Thus, taking into account all financing instruments, this amounts to an interim total financial package of approximately $35 billion, subject to the Bank Group Executive Directors’ approval of the different operations. This package responds to the strong determination and, more importantly, the steps taken by the administration to restore macroeconomic stability. And this package leverages the WBG’s ability to mobilize resources through its private sector arm. In terms of the World Bank program, we anticipate continuing our involvement in priority areas where we are currently active, and particularly in climate change, which is a very current issue as evidenced by the record temperatures this summer.
Question: Are there any sectors or fields that you are interested in and follow in Turkey?
Lopez: In response to the current situation in the country, we also plan to deepen our involvement in some other areas, such as the export sector. Our IBRD team is currently investigating partial loan guarantees, considering the possibility of short-term guarantees for MIGA trade finance, and IFC is looking to significantly expand interventions to support the export sector through trade and supply chain guarantees as well as long-term financing, depending on investment opportunities. In response to the current situation in the country, we also plan to deepen our involvement in some other areas, such as the export sector. Our IBRD team is currently investigating partial loan guarantees. MIGA is considering the possibility of short-term guarantees for trade finance. Depending on investment opportunities, IFC wants to significantly expand its interventions to support the export sector through trade and supply chain guarantees as well as long-term financing.