Mehmet Şimşek explains the impact of the war on Turkey's inflation: At least 5 points

Şimşek made statements regarding the country's economic agenda. The highlights from Minister Şimşek's statements are as follows:

There is a major supply shock. For us, the war is actually a major energy shock; but it is not just energy. When one thinks of energy, oil, natural gas, and their derivatives come to mind. This is not just a shock affecting crude oil and natural gas shipments. The region where the war is taking place, or the Strait of Hormuz and its surroundings, is an important transit point. There is very significant oil and chemical production in that neighborhood. A huge portion of fertilizer and helium production is there. From fertilizer to the raw materials in chip production. Many basic raw materials that come to mind are either produced or processed there. Or their raw materials are there.

Some of clothing is cotton yarn, some is polyester. From shoes to clothing. Let's say oil has risen. These are the primary effects. There are secondary effects. If you don't use fertilizer, you can't get yield. In the world, this shock is multidimensional. On one hand, it negatively affects global growth. Financial conditions have tightened. The risk premium is affected. It also affects exports. This region is the region where we export. 85-90 percent of budget revenues in some countries come from oil. When they cannot sell oil, demand decreases.

Initially, the expectations were these. I am talking about March. Important figures in the US were saying, 'It will end in a few weeks.' Now we have almost reached the middle of June. This shock lasted longer than anticipated. If 20 million barrels are affected today, 4.5 million barrels were affected in past shocks. This shock we are experiencing is larger than those experienced in the past. When we consider the primary direct effects and secondary effects due to the war, and when we consider today's oil pricing, there is at least an additional 5-point inflationary pressure. If it was going to be 21 percent, it is 26 percent.

As this process drags on, the effects can be more intense. When you produce a forecast, the world is not on a linear line; it is complex. Economists and policymakers generally make models. Models are based on assumptions. We say if the oil price is 90 dollars, inflation, current account deficit, and growth will be this. This is based on an assumption. As this drags on, the effects can be more intense. What was the International Energy Agency expecting? It was expecting oil prices at 65 dollars per barrel. Such processes have been experienced in the last 3 months! It is impossible for us to foresee and price these shocks. I am not looking for excuses. We also experienced multiple shocks in 2025. In March with the IMM case; later, Mr. Trump's April 1 trade wars. In June, the 12-day Israel-Iran war. As if these were not enough, we experienced agricultural frost last year. We experienced a serious drought in the summer. It would not be true to say these do not affect us.

I do not hide behind these when we cannot meet inflation targets. Because there are structural issues. Producing a forecast is also not easy. Perhaps we remained a bit optimistic. The impact of the war is significant. We are managing this shock. We update the Medium-Term Program every year. Let's go to the design of this program in 2023. Initially, it was related to managing significant macroeconomic risks. A very large earthquake occurred in 2023. It required the reconstruction and recovery of the destruction caused by the earthquake. If you do not obtain Turkey's resource needs through rational channels, there is a risk of inflation rising to triple digits. There was a risk of the balance of payments being a serious source of stress. The beginning of our design was aimed at managing extreme risks. A major earthquake had occurred. We have the reality of the KKM (FX-protected deposit scheme) that existed at that time. In this ecosystem, we prioritized macro-financial stability. Disinflation starting in the middle or end of 2025, establishing budget discipline, and keeping the current account balance at manageable levels. The most critical component; we built the buffers, so to speak.

"IT IS NOT ALWAYS UNDER YOUR CONTROL"

When you live in a difficult geography, you do not determine the developments outside of you. If it were up to us, the US-Israel-Iran war should not happen. Or Russia-Ukraine. This neighborhood is a difficult neighborhood. Shocks are experienced from time to time. How can we strengthen the body against shocks at all times? There is reserve accumulation here. There is a significant increase in reserves in 2023. Normally, they say, 'If your reserve is enough for 3 months of imports, it is okay.' Currently, ours is enough for 5 months of imports. Looking from here, it is like this. The reserve is sufficient in this state. Secondly, in such shock situations, 'what happens to the exchange rate, interest rate, stock market?'. These are not always under your control. You reduce the risks. Last year, we reduced the budget deficit to 2.9 liras if our national income was 100 liras. In mid-2023, an earthquake happened, we came out of an election, EYT (early retirement) was done. The picture put before us was this; if measures were not taken, if the national income was 100 liras, the budget deficit would be 9.8 liras.

Sooner or later, this war will end. Just as we saw its effect immediately when the war started. Think about it this way, Venezuela started selling oil to world markets. If there is an agreement, Iran can easily supply oil to the world. Turkey is an important importing country; we are a country that has paid 1.1 trillion dollars for oil and natural gas imports in the last 23 years. We have imported oil, natural gas, and derivatives from our neighbors and the world, twice the total private sector and public external debt of Turkey. Turkey is among the countries that will be most positively affected when the oil price falls. This reflects on inflation quickly. There is no reason to be pessimistic.

Inflation will continue its downward trend. Inflation is falling. Of course, it is still high compared to the world. Our fight against the cost of living is not over. This fight requires continuity and determination. If you look at 2025, 3 items constitute 67 percent of expenditures in the Turkey average. Rent and housing is one item. Food is the second item, transportation is the third item. It corresponds to 67 percent. In fact, in the 20 percent segment with the lowest income bracket, these 3 items correspond to 77 percent. What are we doing? One; we are increasing housing supply. I remember very well in the earthquake zone, at one point, rent inflation—I am talking about the period after the earthquake—went up to 118 percent. At the end of 2023, rent inflation across Turkey was 108.6 percent. It was higher in the earthquake zone.

"THERE IS A SERIOUS EFFORT TO INCREASE FOOD SUPPLY"

500 thousand houses have been delivered. 120 thousand houses will also be delivered this year. Currently, rent inflation in the earthquake zone has dropped to 20 percent. We are also working on the supply side. Still, rent inflation across the country is a bit below 50 percent. We renewed the program last year. We renew it every year. The program is a living organism. Let the friends who criticize look. We are constantly reshaping it according to conditions and the needs and expectations of our nation. We said we would build 500 thousand social houses. There are already 'Half is on Us' campaigns that were started previously. I hope in the next 2 years—I am talking about what we have done with public resources—when an additional 750-800 thousand houses are put into service, access to housing will be largely solved. Rent inflation will also be solved. As of the end of this year, rent inflation will drop to the 30-35 percent range.

The food issue has a seasonal dimension. Turkey is a bit of a conservative country, especially regarding fresh fruit and vegetable imports. There was no approach of 'let's balance it with imports even if the product is scarce in this season.' Many countries do this. There is a serious effort to increase food supply. We have started in more or less 45 places that we call organized agricultural zones. The infrastructure of many of them is finishing, we are giving additional resources. There is a tremendous effort to significantly increase greenhouse production in terms of consumption and export in our country. This is not an issue that will be solved in 2 days. We will get the result very clearly in the next 2-3 years. There are other dimensions too. This is a chain. There is production in the field. Delivering this production to the final consumer, especially to big cities, is a chain. From the packaging of the product you collect, to whether it is transported by chain, to how it is displayed at the point it arrives, the waste rate changes. It requires a structural solution to reduce the waste rate. It can be solved with the Wholesale Market Law. Just enacting it is not enough, all components need to act together.

Currently, there are neighborhood wholesale markets, you know. Sometimes we go too. Go on the day these neighborhood markets are open, all vegetable and fruit prices in the markets drop; because there is competition. Why don't we spread this to 7 days a week, to almost all neighborhoods? We are brainstorming this in the Food Committee. Monetary policy is very effective. For example, basic goods. Inflation dropped below 20 percent here. The response of monetary policy is strong there. Durable consumer goods, automotive, white goods. Food supply is related to the supply chain. Building social housing is related to access to housing. Inflation will continue to fall, but some dimensions require structural transformation. It needs some time. Today, excluding China—China is a country the size of a planet, 1.4 billion people, working like a giant machine. Let's put China aside. Until the end of 2023, actual construction started late due to debris removal. How many countries can you count that will produce 650 thousand houses in 2 years? We are doing this with state resources and offering it to our nation within the framework of budget possibilities.

"SOONER OR LATER WE WILL REDUCE IT TO SINGLE DIGITS"

We have cyclical problems. Related to war and climate. We are on the right track, structurally inflation is in a downward trend. We prioritized disinflation. By putting the sliding scale system into effect, we waived budget revenues. This was our nation's expectation. When inflation is high, income distribution deteriorates. Income distribution has started to improve for the last 2 years. The share of employees in national income has increased significantly. Political ownership is very strong. Our President's support is very valuable. That is why we can get results. Didn't all governments in the 90s say we will reduce inflation? Political support is very important here. Under the leadership of our President, we kept inflation in single digits for a long time. Especially those that emerged after the Arab Spring, the treacherous coup and uprisings in our country. Those shocks, priorities, policy implementations, etc. In the end, you were left with double-digit inflation. We will sooner or later reduce this to single digits. Neither our industrialists nor our citizens will achieve lasting and realistic comfort until it drops to single digits.

It is a fact that our real sector has difficulty in accessing finance. However, we are in an intense effort to alleviate these difficulties. Our President says, 'our priority is investment, employment, production, and export.' This is his very clear instruction to us. In 2023, cheap credit, which we call daily rediscount credit, for our exporters was 300 million TL per day. We increased this to 4.5 billion TL. Eximbank gives credit to the exporter. Its capital was 13.8 billion liras, it increased to 100 billion liras. We give 23.9 percent credit to our exporters. We are giving rediscount credit to our exporters with interest below inflation. We will continue and increase this. When conditions permit, we will also lower the cost. Our exporters do not need to worry.

"THE REAL SECTOR IS VERY IMPORTANT TO US"

We have increased our farmers' access to credit. Currently, when they use 100 TL of credit, we give a 70 percent interest subsidy. The Treasury pays 70, our farmer pays 30. This year, credit has been given to 563 thousand of our farmers. Since the beginning of the year, the Treasury has paid 100 billion liras in interest. The Treasury pays 70 percent of the interest on our farmers' loans. Agriculture is related to economic security. Agriculture, national security, and energy, we cannot separate these from each other.

Let's come to the tradesmen. We are giving 50 percent subsidized credit through Halk Bank. The credit subsidy we gave to 71 thousand tradesmen this year is 29 billion liras. As the Treasury, we act as a guarantor and we say to SMEs, we are the guarantor of bank loans. So far, we have prepared a package for SMEs and manufacturers. You might say; the interest on this is high. Let's say inflation is 30 percent. To a certain extent, we will say, 'we can cover the interest above inflation from the budget or another item.' We are currently working on that. We said let's give credit to SMEs at 33 percent. We are listening to the voice of the real sector. The real sector, employment, and production are very important to us.