World Bank official says Turkey's economic U-turn 'step in right direction’

An official from the World Bank praised Turkey’s new economic policies on Thursday and pledged more support as the country continues to battle an economic crisis.

Humberto Lopez, the World Bank’s country director for Turkey, touted the Turkish government’s actions “to restore macroeconomic stability” in an interview with Turkey’s official Anadolu news agency.

“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,” said Lopez.

Lopez added that the World Bank plans to add another $18 billion to its exposure in Turkey over the next three years in response to the government’s actions. This will add to the $17 billion in World Bank programs currently in Turkey.

Bloomberg reported on Tuesday that the World Bank is in advanced talks to pledge $18 billion for projects in Turkey in the next three years.

Why it matters: Turkey’s economy has been in crisis since 2018, marked by the plummeting value of the lira and high inflation. For years, the central bank, under the direction of President Recep Tayyip Erdogan, declined to raise interest rates to combat inflation.

The Turkish government has instituted several fiscal policy changes since Erdogan was reelected in May. Under the new governor, Hafize Gaye Erkan, the central bank raised interest rates in June, July and August. In an effort to reduce Turkey’s massive budget deficit, the government raised taxes on several sectors in July. On the currency, the central bank began phasing out the lira protection scheme known as KKM in August.

Despite the praise from the World Bank, the new policies have their downsides. The tax hikes will make it more difficult for consumers, particularly the poor, to purchase things amid the crisis. Some observers have also criticized the ending of the lira protection scheme as unviable, Mustafa Sonmez reported for Al-Monitor last month.

Inflation is still high in Turkey, with annual inflation hitting 58.94% in August, up 9.09% from the previous month. The lira also remains weak and traded at around 26.8 to the US dollar as of 1 p.m. ET on Thursday. The lira traded at around 18 to the dollar at the same time last year, according to market data.