Turkish Central Bank’s upgraded buffers shield economy from global shocks

The Turkish economy is “positioned” to withstand severe global economic shocks amid reinforced financial buffers and a favorable trajectory in the current account deficit, the Turkish Central Bank (TCMB) governor said.

Fatih Karahan, speaking at the 3rd Global Islamic Economy Summit in Istanbul on Friday, stated that maintaining low inflation is key in establishing a predictable investment environment, as it allows financial actors to offer long-term products at lower rates.

Karahan said the bank prioritizes investments for productivity, as the goal is to create a more productive and prosperous economy, speaking at a panel on the Islamic framework for comprehensive macro-microeconomic integration.

He added that the Islamic finance sector offers massive value in terms of financial inclusion, providing an alternative within the banking system.

“A clear example is the representation of participatory finance in small- and medium-sized enterprise (SME) loans, since many of them can’t access credit via traditional banking instruments, but they can do so through participatory finance,” he said.

“The share of participation finance in total assets rose from around 4.5% in the early 2010s to about 9% today in Türkiye,” he added, noting that the growth has been steady.

Karahan mentioned that participation banks showed stronger credit growth versus commercial banks, while the TCMB is working on financial instruments designed to serve participation finance institutions as well, with liquidity management tools compatible with the alternative system.

“We’ve been working on the calibration process for two years, and participating finance institutions have different business models and customer bases,” he said. “We structured these programs so that Islamic financial institutions can offer them to their customers, helping grow their market share.”

He said Türkiye’s historical tendency to run a current account deficit during periods of strong growth rendered it sensitive to external shocks.

He noted that central banks are far better equipped to deal with situations where changes in demand conditions arise, such as supply chain disruptions caused by events such as the COVID-19 pandemic, the Russia-Ukraine War, and the Middle East conflict.

“Our task becomes increasingly more difficult when there are frequent and large supply shocks, especially when they continue,” he said. “Having various buffers, strong foreign exchange reserves, and not having weak points like the current account deficit are key in dealing with these shocks.”

Karahan added that data released over the past few days showed the Turkish economy is in a strong position in coping with the shocks, as well as in the size of the current account deficit, noting that the current buffers help manage shocks and crises more effectively.

*Writing by Emir Yildirim