IMF Executive Board Concludes 2014 Article IV Consultation with Turkey

Press Release No. 14/535
November 21, 2014

On November 21, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkey.1

Turkey’s economy has grown on average by 6 percent annually since 2010, but this has come at the expense of a large external deficit making the economy sensitive to changes in external financing conditions. Macroeconomic policies have been too accommodative, inflation is high and well above the authorities’ target, real policy interest rates remain negative, and the exchange rate continues to be stronger than suggested by fundamentals. These imbalances are holding back growth potential and increasing risks. They need to be addressed with carefully sequenced macroeconomic policies and structural reforms aimed at increasing aggregate savings, competitiveness and potential output.

The financial system remains well capitalized with non performing loans low and well provisioned. However, banks are increasingly reliant on external wholesale funding in foreign exchange and, in tandem, have increased their indirect foreign exchange risk.

The main risk for Turkey remains a capital flows reversal, associated with monetary policy normalization in advance economies or changes in the country risk premium. Other risks center on slower European growth, geopolitical issues and the strength of the policy framework.

Executive Board Assessment2

Executive Directors welcomed Turkey’s positive growth and employment performance in recent years, and commended the authorities for weathering well financial market turbulence in early 2014. However, Directors noted that high inflation, a large external deficit, and reliance on external financing pose vulnerabilities and could put pressures on the economy. Against this background, they emphasized that macroeconomic policies should be geared towards rebalancing the economy, lowering inflation, and strengthening buffers together with ambitious structural reforms aimed at boosting domestic savings and fully realizing Turkey’s economic potential.

Directors agreed that fiscal policy should play a bigger role in addressing external vulnerabilities and reducing the burden on monetary policy, while providing space for greater spending in priority areas. Accordingly, they supported the fiscal tightening envisaged in the 2015 budget and the substantial increase in the primary surplus within the 2015-17 medium-term program, although a few Directors saw merit in a more ambitious pace of adjustment. Directors agreed that consolidation efforts should primarily focus on improving spending efficiency and limiting current expenditure growth while preserving capital investment.

While welcoming the monetary tightening in early 2014, Directors generally called for a renewed focus on reducing the inflation rate, by setting and sustaining a positive real policy rate to reduce inflation and anchor expectations. Most Directors also encouraged further normalization of the monetary policy framework, which would improve communications and strengthen monetary transmission. A few Directors were of the view that the monetary policy framework could have multiple objectives, taking into account the various challenges the country faces. Directors highlighted that increasing foreign exchange reserves, as market conditions permit, will help strengthen resilience.

Directors noted that the financial system remains sound and well capitalized but called for continued vigilance. They welcomed the success of recent macroprudential measures to limit consumer credit growth, and to encourage more core funding in the banking sector. Directors recommended additional steps to curb growth in wholesale foreign exchange funding and to reduce incentives for the non-financial corporate sector to take on exchange rate risk. They commended the significant progress made in enhancing Turkey’s AML/CFT framework.

Directors emphasized the importance of increasing national savings, particularly private savings, and reducing reliance on external financing. They encouraged the authorities to move forward with the ambitious reform agenda included in the 10th Development Plan, giving priority to increasing private sector savings, improving competitiveness and the business climate, and sustaining education and labor market reforms to boost productivity.

Turkey: Selected Economic Indicators, 2009−15

Population (2012): 74.9 million

Per capita GDP (2012): $10,527


Quota (2012): SDR 1,455.8 million

  2009 2010 2011 2012 2013 2014 2015

Real sector


Real GDP growth rate

-4.8 9.2 8.8 2.1 4.1 3.0 3.0

Contributions to GDP growth


Private domestic demand

-8.3 12.6 9.5 -2.9 5.1 -0.1 2.6

Public spending

0.8 0.9 0.4 1.0 1.6 1.5 0.9

Net exports

2.7 -4.4 -1.1 4.0 -2.6 1.6 -0.4

GDP deflator growth rate

5.3 5.7 8.6 6.9 6.1 9.8 6.7

Nominal GDP growth rate

0.2 15.4 18.1 9.2 10.5 13.0 9.9

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

6.5 6.4 10.4 6.2 7.4 9.0 7.1

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

5.9 8.9 13.3 2.5 7.0 8.8 6.2

Unemployment rate

13.1 11.1 9.1 8.4 9.0 9.5 10.4

Average nominal treasury bill interest rate 1/

11.6 8.5 8.8 8.4 7.4 9.6

Average real policy rate 1/

2.4 -1.6 -0.4 -2.9 -2.5 -0.3

Nonfinancial public sector

(Percent GDP)

Primary balance

-0.9 0.5 2.0 1.3 1.1 0.3 0.9

Net interest payments

4.6 3.7 2.7 2.8 2.7 2.3 2.5

Overall balance

-5.5 -3.1 -0.7 -1.5 -1.6 -2.0 -1.7

General government structural primary balance 2/

0.9 0.6 0.1 -0.7 -0.7 -0.8 -0.6

Debt of the public sector


General government gross debt (EU definition)

46.1 42.3 39.1 36.2 36.2 33.7 32.4

Nonfinancial public sector net debt

39.5 36.8 33.4 30.4 30.0 28.4 27.6

External sector


Current account balance

-2.0 -6.2 -9.7 -6.1 -7.9 -5.8 -6.0

Nonfuel current account balance

2.3 -1.8 -3.6 0.5 -1.9 0.0 -0.4

Gross financing requirement

18.1 18.9 24.6 21.6 25.4 26.8 26.2

Foreign direct investment (net)

1.2 1.0 1.8 1.2 1.2 1.1 1.7

Gross external debt 3/

43.8 39.9 39.2 43.0 47.4 49.4 49.1

Net external debt

24.2 23.8 23.8 24.1 28.0 30.2 30.9

Short-term external debt (by remaining maturity)

15.5 16.2 16.0 18.4 20.8 21.4 20.7

Monetary aggregates


Nominal growth of M2 broad money (percent)

13.0 19.1 14.8 10.2 22.2 13.0 9.9

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

614.4 731.5 774.7 788.6 821.9

GDP (billions of Turkish lira)

952.6 1,098.8 1,297.7 1,416.8 1,565.2 1,769.3 1,944.5

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

1/ Average to latest available.


2/ The structural balance is estimated using the absorption gap method and excludes one-off operations.

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 CBRT).

4/ GDP in U.S. dollars is derived using the average exchange rate (consolidated from daily data published by the CBRT).

1 Under 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.

2 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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