The Turkish government has revised down its economic growth projection for 2026 while simultaneously raising its year-end inflation forecast sharply, revealing increasing strains on economic expansion and external balances as it presses forward with its disinflation strategy. Vice President Cevdet Yilmaz unveiled the 2027-2029 Medium-Term Program on Sunday at the Presidential Complex in Ankara, with Finance Minister Mehmet Simsek and Central Bank Governor Fatih Karahan also present. The fresh blueprint cuts the 2026 gross domestic product growth projection to 3.3% from the previous iteration's 3.8%, with the industrial output target reduced to 2.3%. Growth ambitions for the following three years are set to climb progressively, reaching 4.2% in 2027, 4.6% in 2028, and 5.0% in 2029.

Yilmaz stated that the policy priority remains the resolute continuation of the disinflation process and the permanent establishment of price stability. The upward revision to the inflation forecast is far more pronounced than the modest tweak to the growth outlook, aligning official projections more closely with central bank expectations. The government now predicts year-end inflation of 28.4% for 2026, a significant jump from the 16% figure in the prior medium-term plan. Subsequent targets have been set at 21% for 2027, 13.5% for 2028, and 9% for 2029, indicating that while the government still expects inflation to ease over the next three years, the pace of decline will be notably slower than previously envisioned.

The updated official forecasts have largely converged with both central bank and market predictions. The Turkish central bank's latest inflation estimate stands around 28%, while a survey of market participants puts the figure at approximately 29.4%. This effectively represents an admission by the government that the earlier 2026 inflation goal of 16% is no longer attainable. With first-half growth coming in at 2.5%, the full-year target of 3.8% had already appeared ambitious, and the downward adjustment to the annual growth projection aligns with economic data released so far this year. Data from the Turkish Statistical Institute on August 30 showed GDP expanding 2.3% year-on-year in the second quarter, below the market expectation of roughly 2.9%, bringing cumulative first-half growth to 2.5%. On a seasonally adjusted basis, GDP grew 1.1% quarter-on-quarter in the April-to-June period. Meanwhile, the full-year growth rate for 2025 has been revised to 3.7%.

Following the release of the second-quarter data, Yilmaz had suggested that, based on the 2.5% first-half performance, 2026 growth might come in below the 3.8% set in the then-current medium-term plan. The government's formal reduction to 3.3% effectively confirms that assessment. Even so, the government's projection remains more optimistic than those of most international institutions. The International Monetary Fund projected in July that the Turkish economy would grow around 2.9% in 2026, the World Bank estimates approximately 2.8%, and several major bank research units maintain figures near 3%. Consequently, even after the cut, the official 3.3% growth target still looks relatively upbeat.

The new plan also significantly revises down assumptions about the external economic environment, reflecting heightened pressures from war-related costs and energy prices. The government has lowered its global growth forecast to 3.0% from 3.1%, and sharply reduced the growth projection for Turkey's main trading partners to 1.6% from 2.4%, while the eurozone forecast has been trimmed to 0.9% from 1.2%. For Türkiye, Europe serves as both a crucial export market and a vital source of foreign exchange revenue, meaning slower partner growth could continue to dampen export demand. Concurrently, energy import costs have risen markedly, with the 2026 projection increased to $71 billion from $63 billion, and the goods trade deficit is now expected to widen to $105 billion from $96 billion. As a result, the current account deficit forecast as a share of GDP has been lifted to 2.6% from the previous 1.3%, while the tourism revenue projection has been trimmed to $65 billion from $68 billion.

Yilmaz noted that as of June, the current account deficit stood at around 2.3% of GDP, with approximately 0.7 percentage points attributable to war-related factors. The Turkish central bank has also estimated that the Middle East conflict has contributed a combined direct and indirect impact of around 7 percentage points to domestic inflation through energy prices, exchange rates, and other channels. Thus, a core variable driving this round of economic forecast adjustments is external energy costs and geopolitical shocks. On the macro-stability front, the government underscores the progress made through monetary policy normalization in recent years. As of August 28, the share of lira deposits in the banking system's total deposits has climbed to 61.5% from 31.6%, signaling a marked recovery in the use of the domestic currency by households and businesses. Meanwhile, the risk premium measuring Türkiye's sovereign credit risk has fallen to below 220 basis points from over 700 basis points previously, indicating that international investors' risk pricing of Turkish assets has improved considerably under the framework of high interest rates and a more conventional monetary policy.

Nevertheless, the primary challenge for Turkish policymakers in the coming years will be sustaining the reduction in inflation without inflicting excessive damage on economic growth. On the fiscal side, the government projects the central government budget deficit at 3.1% of GDP in 2026, below the previous target of 3.5%. The deficit is expected to rise again to 3.5% in 2027 before gradually narrowing to 2.8% by 2029. In the labor market, the unemployment rate target for 2026 stands at 8.1%, with a projected decline in subsequent years to 7.6% by 2029. The government also aims for Türkiye's GDP to surpass $2.2 trillion by 2029, with per capita income reaching approximately $25,000, total exports of goods and services hitting $450 billion, and the creation of around 2.1 million new jobs over the coming years.

Notably, compared with the previous version of the plan, the new program also adjusts the growth composition, increasing reliance on private consumption while the contribution of private investment to economic growth is relatively diminished. Overall, the policy signals from Türkiye's latest medium-term program are fairly clear-cut. In the near term, the government has accepted the reality of slower growth and higher inflation, reducing the 2026 growth target to 3.3% from 3.8% and raising the inflation forecast significantly to 28.4% from 16%. Yet the medium-term policy framework remains unchanged, still aiming to create the conditions for a reacceleration of economic growth from 2027 onward through sustained disinflation, lira stability, and improved fiscal discipline.