The World Bank in Türkiye

Country Context

Türkiye is the 19th largest economy in the world, with a GDP of roughly $906 billion. It is a member of the OECD and the G20, and an increasingly important donor of Official Development Assistance.

Türkiye pursued ambitious reforms and enjoyed high growth rates between 2006 and 2017 that propelled the country to the higher reaches of upper-middle-income status and reduced poverty. The share of people below the $6.85 per day poverty line nearly halved to 9.8 percent between 2006 and 2020. 

However, productivity growth has slowed as reform momentum has waned over the past decade, and efforts have turned to supporting growth with credit booms and demand stimulus, intensifying internal and external vulnerabilities. High private sector debt, persistent current account deficits, high inflation, and high unemployment have been exacerbated by macro-financial instability since August 2018.

In an extension of the strong COVID-19 pandemic recovery, the economy grew at 5.6 percent in 2022. However, the economy has been losing momentum amidst a deteriorating external environment and heterodox monetary policies. Two devastating earthquakes struck on February 6th, 2023: beyond the human tragedy, physical damage in 11 provinces accounting for 16.4 percent of Türkiye’s population and 9.4 percent of its economy. Direct losses are estimated at $34.2 billion, but the reconstruction needs could be double. The earthquakes added pressures to an increasingly fragile macro-financial situation. Pre-election spending and reconstruction efforts are expected to support growth, which is forecast at 3.2 percent in 2023 and 4.3 percent in 2024.

Last Updated: Apr 10, 2023

Strategy

The partnership between Türkiye and the World Bank Group (WBG) is outlined in the Country Partnership Framework (CPF), which was initially designed to cover the FY18–21 period but was updated and extended to include FY22–23 through the Performance and Learning Review (PLR) in 2020. The PLR confirmed that CPF objectives remain valid and ensured continued alignment with the Government strategies including the 11th Development Plan (DP, 2019-2023) and the New Economic Program (launched in 2021). The WBG program continues to maintain a long-term focus that maximizes opportunities to support Türkiye’s progression to high-income status.

There are 24 active IBRD operations worth $8.5 billion. The portfolio also includes one Global Environment Facility (GEF)-financed project and six trust-funded projects, including almost $600 million in European Union trust funds through the Facility for Refugees in Türkiye.  The CPF proposed IBRD financing for the FY17–23 period at $7-10.5 billion and, to date, almost $8 billion of this envelope has been delivered. 

The WBG Program for FY23 supports the Government’s goals on mobilizing climate financing. The climate response related lending pipeline in FY23 is rich and is focused on climate change adaptation or mitigation projects that are directly linked to the implementation of Türkiye’s Intended Nationally Determined Contribution (INDCs). As part of the Country Climate and Development Report (CCDR), discussions are underway to step up the ambition under a revised nationally determined contribution (NDC). The Bank is providing assistance to this.

The WBG Program has supported the Government’s strategy to boost human capital, expand opportunities for vulnerable youth and women, and prepare and respond to pandemics.  The WBG portfolio has expanded support to firm-led job creation in vulnerable regions impacted by a high influx of refugees; mitigating learning loss through hybrid and online education; and boosting the Government’s health system response to COVID.  The Bank is in discussions with authorities regarding boosting investments in green human capital, skills and jobs, particularly for vulnerable youth and women.

As part of the EU’s response to the Syrian refugee crisis, the WBG was entrusted with managing a total of $600 million of the EU funded Facility for Refugees in Türkiye (FRiT). In the first tranche agreed in 2016, three projects for a combined total of $205 million were targeted towards education, employment and entrepreneurship. The second tranche ($395 million) supported socio-economic and municipal services projects.  In addition, the Trust Fund portfolio has increased with projects funded by Clean Technology Fund (CTF), EU Instrument for Pre-Accession Assistance (IPA) funds, and GEF funds.

Key ASA Activities: The ASA portfolio is strategically consolidated around core and extended core ASAs including: Country Climate and Development Report, Programmatic Public Finance Review, Pandemic Preparedness and Response, Country Green Growth, Quality Learning and Emergency Response Roadmap, Understanding the Drivers of Regional Disparities in Türkiye and Sustainable, Efficient and Safe Transport for Türkiye. Also, a new Systematic Country Diagnostic (SCD) is being finalized before the end of FY23, as a foundation of the new CPF that will be prepared starting in FY24.

Last Updated: Apr 10, 2023

Recent Economic Developments

Türkiye’s economy grew by 5.6 percent in 2022, from 11.4 percent the previous year, as exports, investment, and manufacturing activity lost momentum. Private consumption, however, remained robust, expanding 19.6 percent in 2022. Value-added growth was led by the services sector (up 9.7 percent) and industry (up 3.3 percent). The labor market, supported by strong economic growth, rebounded fully from the pandemic. The Turkish lira (TRY) lost 30 percent of its value in 2022 despite an estimated S$108 billion in indirect forex interventions by the central bank (CBRT). 

Macro-financial conditions have become increasingly challenging: CPI inflation reached a 24-year high, the heterodox regulatory policy restraints have started to slow credit growth and align lending rates with the reductions in the policy rate. The banking sector continues to have adequate forex liquidity buffers to cover short-term liabilities, however, there are concerns about the accessibility of those buffers in times of stress. Rising exposure of banks through incentivized holdings of government bonds also increases contagion risks.

Fiscal support includes increasing civil servants’ salaries and pensions; energy subsidies; personal income tax allowances; eliminating a retirement age requirement; and financing support for businesses. Rapid growth helped reduce debt-to-GDP levels, yet the Government’s cost of borrowing remains high despite declining domestic bond yields, due to risk premia on government securities; a Eurobond issuance in January 2023 was at 9.8 percent interest rate with 10-year maturity.  

ECONOMIC OUTLOOK

Despite a drag on growth in 2023 due to earthquake-related production, export, and consumption disruptions, economic activity is expected to remain solid, supported by a 55 percent net minimum wage increase in January 2023 and expansionary fiscal policies ahead of the elections scheduled for May. Massive reconstruction efforts in the earthquake zone – with large multiplier effects – will boost growth in late-2023 and beyond. Pre-election spending and earthquake recovery will weaken fiscal balances. Additionally, the 8 most-affected provinces were host to 30 percent of Türkiye’s poor in 2020 with poverty rates much higher than the national average, which could exacerbate inequality. Initial forecasts indicate a worsening of consumption-based poverty rate in 2023. 

The outlook is shrouded by considerable uncertainty and risk under the current macroeconomic policy mix. Post-election economic performance will depend on policy decisions to gradually phase out the heterodox regulatory web that distorts financial markets, and the adoption of macroeconomic policies to rebuild buffers and support investor confidence. Inflationary pressures could arise from fiscal expansion and earthquake-induced agricultural and logistics disruptions. External risks remain elevated given the high current account deficit and low net forex reserves; high external share of public debt slower than expected recovery in the EU; and tightening global liquidity. There is also a risk that investor confidence will falter, intensifying pressure on the Turkish lira, external balances, and corporate and bank balance sheets with the possibility that policy responses cause a real sector contraction.

Last Updated: Apr 10, 2023