In Turkey: Continued Containment of Virus, Support to Vulnerable Households, and Effective Economic Policy Mix, Key to Building Sustained Recovery, Says World Bank

The World Bank issued today its latest edition of the Turkey Economic Monitor (TEM), which takes stock of recent economic developments and provides the World Bank’s analysis of economic prospects in Turkey.

Despite an initial surge, Turkey contained the COVID-19 virus relatively quickly, but continued vigilance is essential to sustain this fragile trend. The economic impacts of this health crisis have been severe and have derailed the gradual recovery from the 2018-19 economic slowdown in Turkey. Current account imbalances have reappeared, as external demand for Turkey’s exports of goods and services dropped on account of a slowdown in global growth.

A global flight to safety of financial capital and a sharp drop in Central Bank reserves have raised external financing and market pressures. External pressures and domestic COVID containment measures led to a sudden halt in domestic output in April-May. These economic impacts have exacerbated labor market challenges that were already building prior to the pandemic, with employment and labor force participation declining.

The impact of the COVID-19-induced shock could push 3.3 million people into poverty. However, three-quarters of these people could be protected from falling into poverty with the expansion of targeted social support programs put in place earlier by the Turkish authorities to respond to the immediate impact of the pandemic.

“A swift and comprehensive policy response to the pandemic helped to mitigate the worst of the effects, and has set the stage for an earlier recovery, assuming the virus remains under control and policy measures continue to be adjusted to the evolution of the pandemic and developments in the national and global economies,” said Auguste Kouame, World Bank Country Director for Turkey.

Turkey faces a difficult year in 2020 like much of the global economy. The Turkish economy is projected to contract by 3.8 percent this year, with an uncertain rebound in 2021. The need for continued COVID-19 containment and vigilance will be a drag on consumption, while corporate debt overhang will weigh on investment, and weak external demand will be drag on exports. The decline in investment and labor force participation is projected to compound the decline in productivity growth and potential output experienced by Turkey and other emerging market economies.

Looking ahead, the report discusses policy priorities for containing economic imbalances, protecting people and promoting financial sector stability.

“A sustained and resilient recovery will be helped by an effective monetary and fiscal policy mix, anchored economic expectations and strengthened external buffers,” noted Habib Rab, Program Leader in the World Bank Turkey Office and team leader for the report.