IMF Executive Board Concludes 2016 Article IV Consultation with Turkey
Turkey’s economic growth continues to show resilience despite several shocks. Growth remains based on domestic demand, in turn, supported by accommodative monetary and fiscal policies. Domestic consumption will receive an additional boost in 2016 after a 30 percent minimum wage increase and relaxation of macro prudential regulation. As a result, external imbalances continue to accumulate with large FX mismatches in the non bank corporate sector: despite a lower current account deficit on the back of lower oil prices, the NIIP remains heavily negative and increasing, with large financing needs.
The economy remains vulnerable to external shocks and the main risk for Turkey remains an acceleration of capital outflows. Hence, rebalancing of the economy, by increasing the structurally low domestic saving rate and reducing external vulnerabilities, remain priorities.
To this end, the government has announced an ambitious program of reforms aiming to increase potential growth and reduce external imbalances in the medium term. Priority should be given to those aimed at boosting domestic savings, productivity and female labor force participation.
Additionally, demand management policies in the form of tighter fiscal and monetary, should be implemented to contain domestic demand until structural reforms deliver results.
Executive Board Assessment2
Executive Directors welcomed the Turkish economy’s resilient growth notwithstanding shocks in 2015. At the same time, they noted that inflation is high and that external imbalances and dependence on external financing pose vulnerabilities. They, therefore, underscored the need to rebalance the economy through macroeconomic policies and structural reforms aimed at increasing domestic savings and raising potential growth.
Directors noted that the fiscal stance this year aims to support growth. They considered that the authorities had been implementing prudent fiscal policy. Looking ahead, they emphasized that strengthening the fiscal position would contribute to reducing external imbalances, lowering inflation, and creating additional space to respond to shocks. Directors recommended prioritizing growth-enhancing spending and adopting a prudent wage policy. They also suggested improving risk management related to public-private partnerships.
Directors generally saw a need for a tighter monetary stance to bring down inflation. They agreed that normalizing the monetary policy framework would improve communication and enhance monetary transmission. Directors also recommended rebuilding international reserve buffers.
Directors took positive note that the banking sector remains well capitalized. They welcomed the gradual reduction in the use of non-core funding and the lengthening of maturities of banks’ wholesale external financing. Nonetheless, indirect exposure to foreign exchange risk remains elevated and profitability has declined. Directors encouraged the authorities to consider additional steps to reduce incentives for the non-financial corporate sector to take on exchange rate risk.
Directors welcomed the authorities’ comprehensive structural reform agenda and encouraged faster implementation to promote economic rebalancing. They supported funding the private pension and severance pay systems to raise saving, and highlighted the importance of improving labor market flexibility, female labor participation, and labor productivity to increase potential growth. Directors commended the authorities for hosting over 2.5 million Syrian refugees and for their efforts to integrate them into the labor market.