By Yeliz Candemir

ISTANBUL--The World Bank revised down its forecast for economic growth in Turkey this year to 3.1% from 3.5% in the aftermath of the failed coup attempt in July though the economy could rebound next year.

"We project growth [in gross domestic product] to rebound 3.5% in 2017, thanks to improving net exports due in large part to the removal of Russian sanctions," the World Bank said on Friday in its latest economic report on Turkey. Russian imposed an embargo on some imports from Turkey when bilateral relations froze after Turkey shot down a Russian jet fighter near the Syrian border last year.

Despite a limited recovery, private investment is likely to remain weak in 2017 amid fragile business confidence, according to the World Bank. The recent depreciation of the Turkish lire has strained corporate finances, the bank said.

The bank's relatively gloomy assessment of the Turkish economy, with private investment and consumption under pressure, comes after Turkey's central bank Thursday raised its interest rates for the first time in almost three years to try to shore up the currency which plunged to new lows against the dollar this month. The bank increased its benchmark one-week repo rate to 8% from 7.5%, while raising the overnight lending rate to 8.5% from 8.25%.

The lira, down by nearly a fifth against the dollar this year, rebounded only briefly amid concern among Turkey's allies about the measures the government has taken against its critics since the coup attempt. The European Parliament voted on Thursday to temporarily freeze talks on Turkey's bid to join the European Union in response to the "disproportionate repressive measures" that lawmakers said Turkish authorities have taken since July.

Turkish lira was trading 0.2% lower at TRY3.4519 against the dollar on Friday, after the currency hit a new low of 3.4767 per greenback early Thursday. Turkey's main BIST-100 stock index was down 0.1%.

A weakening currency risks stoking inflation in Turkey, the World Bank said.

"Volatile food prices and the recent wave of the lira depreciation, if becomes permanent, are the main upside risks on the inflation outlook," the bank said.

Turkey's annual inflation rate slowed to 7.16% in October from 7.28% in September, but remained above the central bank's official target of 5%. The World Bank expects Turkey's annual inflation rate to rise to 8% in the months ahead.

Another danger the country faces is impact of declining revenues from tourism, one of the most important sectors of the economy.

"The current account deficit is likely torise in 2016, as tourism revenues fall," said Donato De Rosa, World Bank lead economist for Turkey. "Foreign arrivals to Turkey dropped sharply in 2016 on the back of Russian sanctions and security concerns, which curbed flows from Russia and Europe," Mr. De Rosa said.

Turkey's annualized current account deficit in September rose to $32.4 billion, or 4.6% of GDP, from $30.6 billion a month ago.

Write to Yeliz Candemir at yeliz.candimir@wsj.com

(END) Dow Jones Newswires

November 25, 2016 03:40 ET (08:40 GMT)

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