IMF Executive Board Concludes Second Post-Program Monitoring Discussions with Turkey

Public Information Notice (PIN) No. 11/24
February 16, 2011

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. The Staff Report may be made available at a later stage if the authorities consent.

On February 11, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Second Post-Program Monitoring Discussions with Turkey.1


The Turkish economy’s strong post-crisis recovery continued throughout 2010, supported by high levels of capital inflows. Growth is projected to have exceeded 8 percent in 2010, placing output above its pre-crisis level, with credit-financed domestic demand the main driver. Helped by a drop in volatile food prices, headline inflation came in just below the 2010 target, while temporary factors compressed core inflation.

Push and pull factors are behind Turkey’s intensified capital inflows. Wide interest rate differentials, Turkey’s relatively healthy public- and private-sector balance sheets, strong near-term growth prospects, increased political certainty, and the prospect of a possible upgrade to investment status have all supported inflows.

Yet availability of abundant low-cost foreign savings has also highlighted Turkey’s vulnerabilities. The rapid bounce-back in the current account deficit (to 6¼ percent of GDP in 2010) reveals the high import content of domestic and external demand and growth’s dependence on capital inflows, which are symptomatic of weak external competitiveness. Predominantly short-term capital inflows—mostly intermediated by the banking sector—have increased exposure to capital flow reversal and associated repricing risks.

To varying degrees, policies implemented in recent months have sought to mitigate these macroeconomic and macroprudential risks. The Central Bank of Turkey (CBT) slowed the pace of liquidity growth, mostly by reducing its foreign exchange purchases and raising reserve requirements. More unconventionally, it also sharply widened its interest rate corridor and lowered its policy lending rate. Some financial sector prudential standards were tightened, including setting ceilings on real estate loan-to-value ratios. The primary balance of the nonfinancial public sector exceeded the budget target in 2010 on buoyant—but partially transient—tax revenue derived from the import boom. Excluding such revenue, the underlying fiscal balance declined, adding to demand pressures. Further demand pressures are expected in 2011.

On the expectation of continuing capital inflows, domestic demand is projected to remain strong and the current account deficit elevated. GDP is forecast to expand by a robust 4½ percent in 2011. Strong import growth amid subdued exports and higher energy prices are projected to widen the current account deficit to 7 percent of GDP. Following a lull early in the year from dissipating base effects, inflation is expected to rise to 6½ percent by end-year on increasing demand and cost pressures.

Executive Board Assessment

Executive Directors welcomed the strong recovery of the Turkish economy during 2010, with output exceeding its pre-crisis level and unemployment moderating significantly. They noted, however, the sharply widening current account deficit, which is linked to weak competitiveness in the context of abundant low-cost external financing.

Directors concurred that Turkey’s main challenge is determining the right policy mix in the face of vulnerabilities arising from excessive domestic demand and volatile short-term capital flows. They recognized that Turkey’s favorable near-term growth prospects and healthy balance sheets would likely continue to attract capital inflows, but also cautioned against the risk of a sudden capital flow reversal. They noted that these vulnerabilities could be effectively addressed through a combination of fiscal and macroprudential tightening, more restrictive liquidity conditions, and competitiveness-enhancing structural reforms.

Directors considered the authorities’ planned fiscal policy in 2011. While some Directors viewed the policy stance as broadly appropriate, many called for fiscal tightening to restrain domestic demand and rein-in the current account deficit.

Directors agreed that monetary policy should continue to focus on price stability, essential for durably strengthening competitiveness. They encouraged the authorities to continue with direct measures to contain liquidity expansion, including limiting exchange rate interventions and increasing reserve requirements. Directors welcomed the early signs of success of the Central Bank’s strategy to allow increased volatility of short-term market interest rates. They noted that recent decreases in policy rates entail some risks and urged the authorities to stand ready to raise the policy rate in the event current measures are insufficient to contain inflationary pressures.

Directors welcomed the authorities’ increased focus on systemic financial-sector risk and a moderate tightening of macroprudential measures. A number of Directors, however, called for further actions in these areas. Directors also welcomed the upcoming Financial Sector Assessment Program update.

Directors encouraged progress on structural reforms to enhance competitiveness and resilience to capital inflows. They welcomed the improvement in accounting standards and strengthening of shareholder rights under the recently approved Commercial Code.

Directors welcomed the authorities’ continued commitment to their Post-Program Monitoring with the Fund.

Turkey: Selected Economic Indicators, 2006−11
  2006 2007 2008 2009 2010 2011

Real sector


Real GDP growth rate

6.9 4.7 0.7 -4.7 8.2 4.5

   Private consumption growth rate

4.6 5.5 -0.3 -2.2 7.3 6.1

   Private gross fixed investment growth rate

15.0 2.6 -9.0 -22.3 29.4 6.6

Contributions to GDP growth


   Private domestic demand

6.3 5.0 -1.8 -8.1 12.1 5.2

   Public spending

0.9 0.8 0.6 0.7 0.1 0.5

   Net exports

-0.3 -1.2 1.9 2.7 -4.0 -1.2

GDP deflator growth rate

9.3 6.2 12.0 5.2 8.1 6.4

Nominal GDP growth rate

16.9 11.2 12.7 0.2 17.0 11.2

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

9.7 8.4 10.1 6.5 6.4 6.5

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

11.6 5.9 8.1 5.9 8.9 6.7

Unemployment rate

10.3 10.3 11.0 14.1

Average nominal treasury bill interest rate

18.1 18.1 19.3 11.4 ... ...

Average ex-ante real interest rate

8.6 6.9 12.2 2.6 ... ...
  (Percent of GDP)

Nonfinancial public sector 1/


Primary balance

4.6 3.2 1.6 -1.0 0.1 0.3

Net interest payments

5.1 4.9 4.4 4.6 3.1 2.5

Overall balance

-0.5 -1.8 -2.8 -5.6 -3.0 -2.1

Debt of the public sector


General government gross debt (EU definition)

46.1 39.4 39.5 45.5 41.7 40.1

Net debt 2/

40.0 34.4 34.5 39.4 36.3 34.9

External sector


Current account balance

-6.1 -5.9 -5.7 -2.3 -6.3 -7.0

Nonfuel current account balance

-1.3 -1.5 -0.2 1.9 -1.8 -2.4

Gross financing requirement

21.0 18.7 18.8 17.0 17.3 20.8

Foreign direct investment (net)

3.6 3.1 2.2 1.1 0.8 1.4

Gross external debt 3/

39.3 38.4 38.0 43.7 40.1 42.7

Net external debt

21.0 21.0 21.7 25.2 24.7 27.7

Monetary aggregates


Nominal growth of M2 broad money (percent)

24.7 15.7 26.7 13.0

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

529.2 649.1 730.3 614.5

GDP (billions of Turkish lira)

758.4 843.2 950.5 952.6 1,114.7 1,239.8

Per capita GDP (2009): $8,711 (WEO)


Quota (2010): SDR 1,191.3 million (1,837 million U.S. dollars)


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

1/ For 2010, numbers reflect central government outturn and projections for state economic enterprises and local government. 2011 fiscal projections assume the authorities adhere to the Medium-Term Program primary balance targets.

2/ Nonfinancial public sector net debt.

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).

1 Post-Program Monitoring provides for more frequent consultations between the Fund and members whose arrangement has expired but that continue to have Fund credit outstanding, with a particular focus on policies that have a bearing on external viability. There is a presumption that members whose credit outstanding exceeds 200 percent of quota would engage in Post-Program Monitoring.


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