Treasury and Finance Minister Şimşek explains the cause of the budget deficit: Sets a date for single digits

Mehmet Şimşek participated in the Global Leaders Summit held in Istanbul with a video speech titled “Turkey’s Economic Perspective for the Next Three Years.”

Explaining the Medium-Term Program (OVP) and the disinflation process, Şimşek said, "As you know, the ultimate goal of our Medium-Term Program is sustainable high growth and a fairer income distribution, but for sustainable high growth, we must absolutely ensure price stability and re-establish fiscal discipline. A sustainable current account deficit is also a must, but the most critical aspect is structural transformation. Because through structural transformation, we will increase our competitiveness. We will raise our welfare level by increasing productivity."

"WE AIM TO REDUCE INFLATION TO SINGLE DIGITS BY THE END OF 2026"

Stating that the most important priority of the OVP is to reduce inflation to single digits, Şimşek said, "We experienced a transition period in inflation last year. Inflation peaked in May. As of the end of this year, we hope to finish inflation at around 41.5 percent, which is the upper band of the Central Bank's target range.

Next year, the target of the Medium-Term Program is for inflation to fall below 20 percent, specifically to 17.5 percent, but we aim to reduce it to single digits by the end of 2026.

For this, our Central Bank has mobilized all the means at its disposal, whether in terms of traditional tight monetary policy, quantitative tightening, or selective credit tightening. Therefore, it has anchored inflation expectations and inflation itself," he said.

"THE BUDGET DEFICIT WAS 5.2 PERCENT LAST YEAR, WE EXPECT IT TO FALL TO 4.9 PERCENT"

Stating that they also aim to reduce the budget deficit alongside disinflation and arguing that the high budget deficit is caused by the earthquake and the EYT regulation, Şimşek continued his speech as follows:

"Alongside disinflation, another important goal of ours is to permanently reduce the budget deficit to below 3 percent. As you know, our budget deficit has been running quite high last year and this year due to the earthquake and also due to the EYT regulation. As a ratio to Gross Domestic Product, the budget deficit was 5.2 percent last year. We expect it to fall to 4.9 percent this year, but next year is critical for us. To support the disinflation process, we aim to reduce the ratio of the budget deficit to national income to around 3 percent.

In the following years, we will provide strong support to disinflation by pulling it below 3 percent. Another one of our goals is to permanently reduce the current account deficit to 2 percent and below. Last year, the current account deficit was around 4 percent. This year, we foresee it to be below 2 percent, at 1.7 percent. We have a current account deficit forecast of around 2 percent for next year. In the following years, we are targeting a current account deficit between 1.5 and 2 percent.

A current account deficit below 2-2.5 percent means that Turkey's ratio of external debt to national income is now falling. Secondly, it allows for reserve accumulation. Because one of our goals is to increase Turkey's reserve adequacy. Thus, it is to reduce Turkey's external vulnerabilities. As a result of these policies, there will be a temporary slowdown in growth, but we will transition to a more balanced, more sustainable, high growth."

"A DISINFLATION PROGRAM"

Noting that Turkey has been in the middle-income group for 20 years, Şimşek said, "Growth was around 5 percent last year, but more than 8 points of this was sourced from domestic demand. The contribution of net exports was over -3 points. It was unbalanced growth, and this was causing inflation and the current account deficit.

This year, growth is more modest; we foresee growth of around 3.5 percent, but 1 point of this growth will come from external demand. 2.5 points will come from domestic demand.

Our program is essentially a disinflation program. Along with disinflation, we want to transition to sustainable high growth. The purpose of disinflation is to truly increase predictability and welfare in Turkey in a permanent way. Disinflation has begun. Turkey is moving into the lower-middle-income group in the 1950s," he said.

"TURKEY ROSE TO THE UPPER-MIDDLE-INCOME GROUP WITH THE AKP"

Arguing that Turkey has permanently moved into the upper-middle-income group since 2004 under the AKP government, Şimşek said, "This is an important achievement, but we have been there for 20 years since 2004. Now our goal is to move Turkey up to the high-income group. This is one of the important goals of the program. For this, we need to use our working-age population well. That is, we need to increase employment and increase labor force participation rates," he said.

Responding to criticisms regarding economic policies, Şimşek concluded his words as follows:

"Compared to countries similar to us, the growth in our working-age population is still good. Of course, the country is aging, but there is still a window of opportunity. We have a window of opportunity of 15-20 years. Therefore, we will use this window of opportunity well and put Turkey into the high-income country group. As you can see, our Medium-Term Program does not only include tight monetary policy, it does not only include the establishment of fiscal discipline.

We are not after a temporary correction. At first, they said 'there is no program,' then they said 'there is a program but no one will buy this program.' Then they said 'resources are coming but this is hot money.' Those who do not read the program and do not understand the program insist on approaching it with such a perspective.

Of course, we are open to criticism. Your constructive criticisms are very valuable to us, but I want to underline this. Turkey will eliminate its imbalances with this program and will return to a high sustainable growth path. We will achieve this, but of course, belief in this program will accelerate this success."

News Source: 12punto