The World Bank issued its latest edition of the Turkey Economic Monitor (TEM) on Aug. 12, in which it pointed to the sharp drop in Turkey’s Central Bank reserves.
“A global flight to safety of financial capital and a sharp drop in Central Bank reserves have raised external financing and market pressures,” it said in the report.
External pressures and domestic COVID-19 containment measures led to a sudden halt in domestic output in April-May, it said, adding that these economic impacts have exacerbated labor market challenges that were already building prior to the pandemic, with employment and labor force participation declining.
According to the World Bank, Turkey contained the COVID-19 virus relatively quickly despite an initial surge, but “continued vigilance is essential to sustain this fragile trend.”
“The economic impact of the COVID-19 health crisis has understandably derailed a fragile economic recovery in Turkey. By the second half of 2019, the economy started to gradually recover from the shock of the mid-2018 economic turmoil. Inflation moderated and external balances narrowed,” it said.
The impact of the COVID-19-induced shock could push 3.3 million people into poverty, the World Bank said, while noting that 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.
“The Turkish economy is projected to contract by 3.8 percent in 2020 in the baseline scenario. Important sectors in the Turkish economy are highly vulnerable to COVID-linked economic strains, which could further lower employment, reduce labor force participation and increase the poor population by 1.2 million in 2020,” the report read.
“Like other emerging market economies impacted by the crisis, Turkey will likely experience a decline in potential output, which is estimated to have fallen below 4 percent in 2019, its lowest level in 15 years,” it noted.
“Though short-term external debt obligations seem manageable, a growing current account deficit and the sharp decline in reserves have heightened external vulnerabilities.”
According to the World Bank, policy measures have provided important relief to households and businesses, but the challenge now is to build resilience and accelerate recovery.
“This may require maintaining fiscal responsiveness and flexibility, whilst containing further monetary easing; scrutinize impact of forbearance measures and adjust to maintain financial sector stability; expand household support programs to protect livelihoods and human capital; and rebuild better by accelerating structural reforms,” it said.