IMF Issues Cautionary Advisory to Turkey on Minimum Wage Increase

The International Monetary Fund (IMF) emphasized that Turkey should avoid implementing another substantial minimum wage increase in January, following last year's significant hike. Jim Walsh, IMF's Chief for Turkey, conveyed during the IMF World Bank annual meeting in Washington that any increase should be balanced with measures to support the poorest segments of the population.

Walsh noted that after the minimum wage was increased by 49% in January this year, inflation rose in the first quarter, cautioning that a similar hike could elevate inflation expectations. The IMF suggests that Turkey should develop cash transfers or better-targeted social programs to support low-income households.

Walsh also advised that further interest rate hikes might be necessary, warning against calls to reduce interest rates while inflation remains around 2%. The Central Bank of Turkey might need to increase rates further to achieve the 14% inflation target by the end of 2025. In October, the Central Bank kept interest rates steady, pointing to increased uncertainty due to rising inflation data, making economists anticipate rate reductions only in the following year. This scenario highlighted the need for strengthened communication from the Central Bank.

The IMF pointed out that Turkey's massive energy import needs make it more susceptible to rapid inflation increases and called for an enhancement of renewable energy production. Walsh suggested reducing costly energy subsidies while protecting poorer households from adverse effects. The IMF's recommendations include alleviating the budgetary strain of energy subsidies and promoting renewable energy sources, indicating that creating a more resilient economy against energy shocks could bring long-term fiscal savings.