ANKARA: The World Bank has unveiled a new $18 billion loan package for Turkiye in what appears to be a show of support for the government’s efforts to reshape its economic policy.
The deal, which comes on top of a $17 billion loan signed off by the lender 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 targets for inflation, employment and economic growth for the 2024-26 period.
Two-thirds of the new loan are expected to be directed toward the private sector in the form of direct investments and guarantees. The remainder will help to finance public sector activities, including the extensive reconstruction work necessary after the devastating earthquakes that struck the southwest of the country in February.
Turkiye has a strong potential to rise once it adopts correct policies to address its macroeconomic imbalances.
Selva Demiralp, Professor of economics
In an interview with the state-run Anadolu news agency, Humberto Lopez, the World Bank’s country director for Turkiye, praised the government’s efforts to restore macroeconomic stability.
“We believe that the monetary policy tightening being implemented by the central bank, the unwinding of distortive financial regulations and the fiscal revenue measures to curtail the fiscal deficit being pursued by the Ministry of Finance are steps in the right direction,” he said.
“In addition to our ongoing $17 billion program, new operations worth $18 billion will be prepared and presented to the World Bank Group’s board of directors in the next three years.
“Taking into account all financing instruments, this amounts to an interim total financial package of approximately $35 billion.”
Amid an ongoing economic crisis, the appointments of former Merrill Lynch economist Mehmet Simsek as finance minister and ex-Goldman Sachs banker Hafize Gaye Erkan as central bank governor after the May election were seen as evidence of Turkiye’s determination to return to a more orthodox monetary policy. The $17 billion loan package was approved before that poll took place.
Timothy Ash, a London-based strategist at Bluebay Asset Management, said the timing of the new deal suggested an improvement in Turkiye’s relations with its Western allies, which would have been influential in the bank’s decision.
“We should now watch for other multilateral development banks and international financial institutions to follow suit and increase exposure,” he told Arab News.
The deal was “a vote of confidence” for Simsek and Erkan and their more orthodox policies, he said.
In its recently unveiled economic road map, Turkiye aims to become a high-income country, with a GDP of over $1.3 trillion and per capita national income of $14,855, by 2026.
The new medium-term economic plan includes reforms to public finances, trade, the investment environment, employment, human capital and disaster management. Simsek said Erdogan was fully behind the program.
However, experts like Wolfango Piccoli, co-president of London-based Teneo Intelligence, said that while the World Bank loan agreement was meaningful, it was “nothing close to a possible standby agreement” with the International Monetary Fund.
“Leaving aside the size of the package from the World Bank, a deal with the IMF would greatly boost investors’ confidence in Turkiye,” he told Arab News.
An IMF deal would also add transparency to the country’s public finances, including the guarantees provided by the Treasury for public-private partnership projects, and require agenda reforms that were politically unpalatable to the government, Piccoli said.
“The $18 billion in loans from the World Bank cannot achieve anything like that. I think most of the funds will be used for the reconstruction of the areas devastated by the earthquake,” he said.
“It is good news for Turkish firms who may be able to secure loans and guarantees from the World Bank but for foreign investors the package is unlikely to move the needle.”
Selva Demiralp, a professor of economics at Koc University in Istanbul, said the World Bank deal did appear to be a show of support for Turkiye’s post-election economic plans.
Turkiye "has a strong potential to rise once it adopts correct policies to address its macroeconomic imbalances,” he told Arab News.
“The evident abandonment of the policies that were implemented before the election is a strong step in the right direction. (However,) I have questions regarding the sustainability of the program that is laid out by the OVP (medium-term economic program).
“The World Bank seems more convinced. Then again, we are not present at investor meetings … so I cannot tell what will be different this time around by just looking at the OVP,” he said.
“Talking to the politicians directly might provide a clearer picture than what is hidden in the mid-term targets laid out in the program. It is true that the internal consistency of the OVP is much improved. Nevertheless, the document is notorious for missing its targets.
“The growth targets seem ambitious if the disinflation path will hold, for example,” Demiralp said.
“It might be possible with significant capital inflows, and the World Bank loan could be an important step in this direction. But that alone won’t be sufficient given that the toll of the earthquake itself is close to $100 billion.”
Meanwhile, leaders from the world’s top economies, including Turkiye and Saudi Arabia, convened in India on Friday for a two-day G20 summit.
The Turkish government has forecast inflation to hit 65 percent by the end of the year, before dropping to 33 percent in 2024. It also cut its economic growth forecast to 4.4 percent for this year and 4 percent in 2024. The nation’s current account deficit is expected to be $42.5 billion this year and $34.7 billion in 2024.
In June, the central bank increased interest rates to 25 percent, from 8.5 percent, in a bid to temper inflation, which rose to 58.9 percent last month.
The Turkish lira remained weak on Friday, at about 26.8 to the US dollar, down from 18 to the dollar at the same time last year.