Minister Şimşek: "If You Look at the Big Picture, Disinflation Has Begun and Will Continue"

Forex - The Minister of Finance and Treasury, Şimşek, emphasized that while factors that could lead to uncontrolled inflation are being brought under control, there is a decline in inflation. He stated, "Therefore, if you look at the big picture, disinflation has begun and will continue."

In his speech at the IICEC Conference organized under the theme "Economic Growth and Energy: Shaping the Economy of the Future," Minister Şimşek pointed out that the budget deficit will decrease in 2025, adding, "As the current account deficit decreases, it supports this disinflation."

Şimşek addressed the following points in his statement: "Now let's come to the difficult part, the inflation part. Of course, there is a serious inflation problem in Turkey, and the cost of living issue is very clear. One of the main objectives of this program is to ensure price stability. For this, the necessary monetary policy framework, the necessary fiscal policy framework, and the structural policy framework that will support it, including the revenue policy framework, as well as policies on managed and directed prices will all be supportive in 2025.

You might say that inflation is high in 2024, which is true, but it was at 65% at the beginning of the year, and if we close the year at 44-45%, a decrease of nearly 20 points is not a bad decline; the issue is to make this sustainable, that is, to ensure its permanence.

Here, I want to emphasize the following: there was rigidity in service inflation, which is true worldwide. The rigidities in service inflation will be resolved over time; I say it has started to resolve. 2025 will be much more supportive in this sense, particularly in terms of rent, education, and so forth. Because core goods inflation is at 29%, and goods inflation including food is below 40%, so there is indeed a significant decline in inflation, and this will continue.

Some say that, well, they took inflation from this level and raised it to that level; where is the success? Of course, this involves a very static approach. If Turkey had not managed the exit from the Currency Protected Deposit system and reduced the risks of monetaryization, controlling the budget deficits… Because we spent 75 billion dollars to heal the wounds of the earthquake. Look, 2.6 trillion for 2023-2024, when divided by today's prices, is approximately 75 billion dollars. The factors that could lead to uncontrolled inflation are being brought under control, and on the other hand, there is a decline in inflation. Therefore, if you look at the big picture from that perspective, disinflation has started and will continue. Of course, we care about market expectations, household expectations, and real sector expectations. Household expectations are indeed high, but there is a decline. When we ask the real sector what will inflation be in 12 months, they say it will be 48; however, at the end of the year, it is projected to be 44. Are we entering a new phase in monetary policy or fiscal policy, or are we entering a different phase in income policy? The real sector thinking this way is quite noteworthy. We faced some difficulties in making sense of this. When we asked market participants, there is a 27% inflation expectation for the next 12 months.

So, what will happen in 2025? First, monetary policy will have a delayed strong effect. We will reduce the budget deficit; therefore, there will be a negative impact. A more supportive income policy; we are currently evaluating whether to adjust the inflation of some critical managed prices, such as fuel. But the most important thing is supply-side policies. Now, the budget deficit is a critical area for me; we have significantly addressed the wounds of the earthquake. Therefore, the budget deficit will decrease in 2025; it will be around 3 or a bit below or above, but because the deficit will decrease, it supports this disinflation, very simply. Housing: there is currently a huge housing mobilization due to the earthquake. That is, 200,000 houses will be delivered by the end of this year, and in the next year or so… I can't know exactly, since it's a construction process, but in the next 1-1.5 years, another 250,000 houses will come, and this means an increase in housing supply. Not enough, we also have a project for 250,000 social housing continuing. These are significant numbers. Look, from the 1980s to the early 2000s, 43,000 social houses were built; since then, 1.5 million social houses have been constructed. Therefore, we will increase this housing supply and facilitate our citizens to rent or own homes at reasonable values. In supply-side policies, food is very critical for us. Our top priority here is to accelerate irrigation and consolidation investments, enhance food logistics, support and increase organized agricultural regions."

• Şimşek: "In the medium term, we can move to a current account surplus through structural reforms." Minister of Finance and Treasury, Mehmet Şimşek, stated, "We do not have an exchange rate target, nor can we have one. Turkey is in the best position among developing countries. We have the potential to enter the group of high-income countries within 1-2 years."

Minister Şimşek emphasized that the disinflation process is continuing. Regarding the exchange rate target, he stated, "We do not have an exchange rate target, nor can we have one."

Pointing out Turkey's potential to enter the group of high-income countries, Minister Şimşek remarked, "Turkey still has a window of opportunity to become richer without aging. Turkey is well positioned among developing countries. We will invest in digital infrastructure. Within one or two years, we have the potential to enter the group of high-income countries. We are nearing the EU countries in per capita national income. The increase in income highlights the importance of combating inflation once again. We are continuing our program with patience and determination. Our growth potential remains high. Our debt ratio is low. With disinflation, we will encounter much better financial conditions."

"In the medium term, we can move to a current account surplus through structural reforms," Minister Şimşek stated, adding, "We are creating fiscal space for reforms. Citizens are complaining about the cost of living; we know the issues, we hear you. Of course, there is a slowdown in the short term, but there is no doubt in the long term. Our stability and reform program is still working; the ultimate goal of the program is sustainable high growth and a fairer income distribution. Through structural transformation in the medium term, we can move to a current account surplus."

In discussing the exchange rate target, Minister Şimşek expressed, "There is no exchange rate target; this year, there was a significant capital flow; we had to buy 110 billion dollars in foreign currency, and despite this, we managed it. Managing capital flows requires a completely different skill set; our Central Bank has done a good job in this regard. Our debt ratio is low. With disinflation, we will encounter much better financial conditions. One of the key objectives of the program is to ensure price stability."

Speaking about the cost of borrowing for the Treasury, Minister Şimşek stated, "Turkey's borrowing costs have decreased. If the current situation continues over the next five years, we will gain an advantage of 7 billion dollars from external debt annually."

"We will create opportunities for reasonable value rental and homeownership," Minister Şimşek noted, adding that "intensive work is underway in housing production. Due to the earthquake, there is a huge housing mobilization; 200,000 houses will be delivered by the end of this year. Within the next 1-1.5 years, another 250,000 houses will be coming. We will increase housing supply and facilitate our citizens to rent or own homes at reasonable values."

"Decline in inflation will continue," Minister Şimşek commented on the inflation issue, stating, "At the beginning of the year, it was 65%; if we close the year at 45%, a 20-point decline is significant. There was rigidity in service inflation, which will resolve over time; it has started to resolve. 2025 will be much more supportive in this regard. Core goods inflation is at 29%, goods inflation including food is below 40%, there is a significant decline in inflation, and this decline will continue. If you look at the big picture, disinflation has begun and will continue. The budget deficit will decrease in 2025; if the deficit decreases, it supports this disinflation."