IMF Executive Board Concludes 2010 Article IV Consultation and Post-Program Monitoring with Turkey

Public Information Notice (PIN) No. 10/107
July 30, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 30, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation and Post-Program Monitoring with Turkey.1


Almost a decade of sound macroeconomic policies and reforms allowed Turkey to enter the global financial crisis in a stronger position than many other countries in Emerging Europe. Prior to the crisis, a more contained foreign credit-induced boom, better focus of policies on leaning against the cyclical upswing, and a more restrictive regulatory environment for credit helped limit the build-up of vulnerabilities and kept banks’ and households’ balance sheets strong.

These strengths helped the Turkish economy rebound quickly from the steep drop in output precipitated by the global financial crisis. After plummeting during late 2008 and early 2009, GDP recovered rapidly on the reflow of capital and the consequent improvement in domestic confidence. The broadly appropriate relaxation of fiscal, monetary, and financial policies also contributed to the recovery. In all, GDP fell 4¾ percent in 2009. However, the current account deficit, which shrank in 2009 on weak demand, has since widened. Large excise increases and food price shocks in early 2010 caused a temporary spike in inflation that also raised inflation expectations. Unemployment, while moderating from its peak, remains elevated. Nevertheless, the banking sector has seen only a modest rise in the share of nonperforming loans and capital adequacy ratios remain high.

The recovery is expected to remain strong in the near term, accompanied by widening external imbalances. Growth is likely to exceed 6 percent this year owing to base effects and solid within-year momentum from credit-driven demand. Inflation is forecast to continue to subside but remain in the upper half of the target band. With the resumption of growth and abundant global capital flows, the current account deficit is expected to widen to 4¾ percent of GDP on buoyant import growth. This reflects the heavy cost of formal sector employment and the high energy intensity of output. With growth dependent on foreign financing, low reserve cover and the shorter duration of capital inflows could raise output volatility if global conditions deteriorate or risk appetite weakens.

Executive Board Assessment

Executive Directors commended the Turkish authorities for their far-reaching reforms and prudent policy stance that limited vulnerabilities prior to the crisis, paved the way for an effective crisis response, and contributed to the robust economic recovery now underway. Directors considered that Turkey’s main challenge is to contain external imbalances that could undermine the recovery. In particular, they noted that an excessive reliance on imports would deteriorate the external position, making growth dependent on potentially unstable external financing, given the uncertain global outlook.

Directors observed that containing external imbalances requires bringing forward the exit from crisis-related stimulus and undertaking reforms to limit import dependence by lowering production costs. They encouraged the authorities to step up the unwinding of fiscal stimulus in 2010 by saving all revenue overperformance in excess of mandatory spending increases. This would help contain current account and inflation pressures, limit private sector crowding out, and reinforce the authorities’ fiscal discipline credentials.

Directors welcomed the preparation of a new fiscal rule, which they considered would significantly strengthen the policy framework, and hoped that it will underpin the preparation of the 2011 budget. In this regard, they looked forward to a swift approval of the draft legislation and hoped the delay in its consideration would be short lived. They noted that the success of the rule would depend on the authorities’ steadfast commitment, backed by strong political support and sufficient auxiliary measures, including a strengthening of tax administration and containment of spending pressures.

With interest rates in advanced countries at historical lows and inflation pressures at home moderating, most Directors called for a gradual monetary tightening, which would obviate the need for a sharper and larger tightening later on. Directors endorsed staff’s proposal for a moderate increase in the amount of daily, preannounced foreign-currency purchases to more quickly build reserves to protect against capital account volatility, while preserving exchange rate flexibility within the inflation-targeting framework.

Directors generally called for phasing out financial sector regulatory relaxation—initially introduced, as in many countries, in response to the global crisis. To prevent the buildup of future risks, Directors recommended strengthening macro-prudential regulations on credit cards, unhedged lending to firms, and debt-service limits on mortgages, as well as utilizing more comprehensive stress test scenarios. Directors welcomed the authorities’ request for an FSAP update during 2011.

Directors took note of staff’s assessment of the existence of a competitiveness gap. They underscored the need for bold structural reforms to bolster competitiveness, secure job-rich growth, reduce reliance on external saving, and lower import dependence. They advocated better alignment of employment costs with those of regional peers. In this regard, Directors welcomed the preparation of a comprehensive employment strategy, which aims at increasing flexibility and addressing some structural issues in the labor market. Sustained and uniform application of the energy cost pass-through pricing formula would moderate demand for imported energy by promoting conservation and more efficient generation capacity.

Turkey: Selected Economic Indicators, 2005−10

  2005 2006 2007 2008 2009 2010
          Prelim. Proj.


Real sector


Real GDP growth rate

8.4 6.9 4.7 0.7 -4.7 6.1

Private consumption growth rate

7.9 4.6 5.5 -0.3 -2.3 6.1

Private gross fixed investment growth rate

16.2 15.0 2.6 -9.0 -22.3 20.5

Contributions to GDP growth


Private domestic demand

8.8 6.3 5.0 -1.8 -8.1 8.7

Public spending

1.0 0.9 0.8 0.6 0.7 -0.5

Net exports

-1.4 -0.3 -1.2 1.9 2.7 -2.1

GDP deflator growth rate

7.1 9.3 6.2 12.0 5.4 8.2

Nominal GDP growth rate

16.1 16.9 11.2 12.7 0.4 14.8

CPI inflation (12-month; end-of period)

7.7 9.7 8.4 10.1 6.5 7.6

PPI inflation (12-month; end-of-period)

2.7 11.6 5.9 8.1 5.9 7.1

Unemployment rate

10.2 9.9 10.3 11.0 14.1

Average nominal treasury bill interest rate

16.2 18.1 18.1 19.3 10.9 ...

Average ex-ante real interest rate

6.0 8.6 6.9 12.2 2.0 ...
  (Percent of GDP)

Nonfinancial public sector 1/


Primary balance

5.0 4.7 3.1 1.6 -1.0 -0.3

Net interest payments

5.3 5.1 4.9 4.4 4.6 3.7

Overall balance

-0.3 -0.4 -1.9 -2.8 -5.6 -4.1

Debt of the public sector


General government gross debt (EU definition)

52.3 46.1 39.4 39.5 45.4 44.1

Net debt 2/

46.3 40.0 34.4 34.5 39.4 38.4

External sector


Current account balance

-4.6 -6.1 -5.9 -5.7 -2.3 -4.7

Nonfuel current account balance

-0.7 -1.3 -1.5 -0.2 2.0 -0.2

Gross financing requirement

15.9 21.0 18.7 18.8 17.0 14.9

Foreign direct investment (net)

1.9 3.6 3.1 2.2 1.0 1.2

Gross external debt 3/

35.2 39.3 38.4 37.9 43.6 41.3

Net external debt

20.3 21.0 21.0 21.6 25.1 25.0

Short-term external debt (by remaining maturity)

14.2 15.0 11.6 15.5 13.2 15.2

Monetary aggregates


Nominal growth of M2 broad money (percent)

24.5 24.7 15.7 26.7 13.0

GDP (billions of U.S. dollars) 4/

482.7 529.2 649.1 730.3 615.3

GDP (billions of Turkish lira)

648.9 758.4 843.2 950.5 954.0 1,095.6

Per capita GDP (2009): $8,723 (WEO)


Quota (2009): SDR 1,191.3 million (1,837 million U.S. dollars)


Sources: Turkish authorities; and IMF staff estimates and projections.

1/ Fiscal projections assume the authorities adhere to their budget target for 2010.
2/ Nonfinancial public sector net debt.< br /> 3/ The external debt ratio is calculated by dividing external debt numbers in U.S. dollars based on official Treasury figures by GDP in U.S. dollars calculated by staff using the average exchange rate (consolidated from daily data published by the CBT).
4/ GDP in U.S. dollars is derived using the average exchange rate (consolidated from daily data published by the CBT).

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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