## 2020. Some fiscal space remains available, albeit somewhat limited by contingent liabilities

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### Recent developments and vulnerabilities
- Growth rebound:
  - Rapid money growth and credit provision by state-owned banks, and extensive liquidity support contributed to a sharp activity rebound in the second half of 2020.
- Inflation and exchange rate pressures:
  - Higher inflation and increased dollarization increased pressure on the lira.
  - The lira stands nearly 40 percent below its pre-pandemic level.
- Reserves and external positions:
  - Heavy foreign exchange sales led to steep reserve declines from already-low levels.
  - Gross reserves are well below the recommended adequacy range.
  - Net international reserves are negative once foreign exchange swaps with the central bank are subtracted.
- Balance sheet strains:
  - Lira depreciation added to non-financial corporate and bank balance sheet strains.
- Policy shift and credibility:
  - A shift towards a firm monetary policy stance since the Fall was initially well received but its durability was called into question following central bank leadership change in March 2021; the lira weakened markedly and interest rate spreads widened.
- Pandemic impact:
  - As of late-April (2021), more than 4 million COVID-19 cases had been reported in Turkey, with over 36 thousand fatalities.
  - Vaccination started in January 2021, with 6 and 9 percent of the population partially and fully vaccinated by late April.
  - Authorities target vaccinating around 60 percent of the population by Autumn 2021.

### Outlook and risks
- Growth projection:
  - Growth should reach about 5¾ percent in 2021, mainly reflecting a large positive carryover from the sharp rebound in H2 2020, before returning to a lower trend from 2022 onwards.
- Inflation and reserves:
  - Inflation is expected to remain high.
  - Reserves are expected to decline further.
- Vulnerabilities and risk drivers:
  - High external financing needs, sizeable domestic foreign exchange deposits, and low reserve buffers increase vulnerability to shocks and sentiment shifts.
  - Domestic risks: premature relaxation of monetary and credit policies or other policy missteps that further erode credibility and buffers.
  - External risks: interest rate increases in advanced economies and higher global risk aversion that could expose vulnerabilities.
  - Other risks: vaccination delays and adverse geopolitical developments.

### Executive Board assessment and policy recommendations
- Commendation and concerns:
  - Directors commended Turkey for the remarkable recovery but noted that policies that supported the recovery also fueled inflation and external imbalances, and exacerbated pre-pandemic vulnerabilities (low reserves, large external financing needs, and dollarization).
- Monetary policy:
  - Strongly commit to, and deliver, a firm monetary policy stance to bring inflation towards target.
  - Welcome the shift toward tighter policy and encourage further timely and well-calibrated tightening if inflation expectations increase further.
  - Emphasize strengthening central bank independence, rebuilding high-quality reserves, simplifying the operational framework, and improving policy communication.
- Fiscal policy:
  - Noting relatively tight fiscal targets for 2021, see scope for additional targeted and temporary support in 2021 to help vulnerable sections of society and minimize scarring.
  - Such support should be accompanied by a credible consolidation plan to lower debt over time, to be legislated now and enacted when the recovery is entrenched.
  - Some Directors supported firm fiscal restraint to reduce persistent imbalances and boost policy credibility.
  - Encourage strengthening debt management, better monitoring of quasi-fiscal operations and extra budgetary institutions, and enhancing fiscal transparency.
- Financial sector:
  - Further reining in and refocusing state-owned bank credit growth; carefully monitor bank foreign exchange liabilities.
  - Gradually reverse regulatory flexibility and loan deferrals as the pandemic recedes.
  - Once the pandemic fades, a third-party asset quality review would help better understand underlying bank health.
  - Additional reforms to strengthen regulatory, resolution, and AML/CFT frameworks to support financial stability.
- Structural reforms:
  - Focus on female labor force participation and youth employment, increase labor market flexibility, ensure viable but temporarily insolvent firms are restructured while winding down unviable firms.

### Key statistics and projections (selected)
- Population (2020): 83.6 million
- Per capita GDP (2020): US$8,562
- Quota: SDR 4,658.6 million
- Real GDP growth rate:
  - 2019: 0.9
  - 2020: 1.8
  - 2021 (Proj.): 5.8
  - 2022–2026 (annual proj.): 3.3, 3.3, 3.3, 3.3, 3.3
- Contributions to real GDP growth (selected):
  - Private consumption (2019–2026): 0.9, 1.7, 3.4, 1.5, 1.8, 1.9, 2.1, 2.2
  - Investment (incl. inventories) (2019–2026): -3.8, 7.1, -3.3, 0.4, 1.5, 1.4, 1.2, 1.3
  - Net exports (2019–2026): 3.2, -7.3, 5.3, 1.0, -0.5, -0.4, -0.5, -0.7
- Output gap (2019–2026): -0.8, -2.2, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- GDP deflator growth rate (2019–2026): 13.9, 14.3, 20.4, 11.4, 11.0, 11.5, 12.4, 12.2
- Inflation (period-average, 2019–2026): 15.2, 12.3, 16.9, 14.9, 12.8, 12.5, 12.5, 12.5
- Inflation (end-year, 2019–2026): 11.8, 14.6, 16.5, 14.0, 12.5, 12.5, 12.5, 12.5
- Unemployment rate (2019–2026): 13.7, 13.2, 12.5, 11.0, 10.5, 10.5, 10.5, 10.5
- Fiscal sector (Percent of GDP):
  - Nonfinancial public sector overall balance (2019–2026): -5.8, -5.4, -6.1, -6.3, -6.5, -6.5, -6.6, -6.7
  - General government overall balance (headline) (2019–2026): -3.7, -4.5, -5.7, -6.0, -6.2, -6.2, -6.3, -6.4
  - General government gross debt (EU definition) (2019–2026): 32.6, 39.5, 40.2, 41.5, 43.4, 44.6, 45.6, 46.5
- External sector:
  - Current account balance (2019–2026): 0.9, -5.1, -2.7, -1.7, -1.8, -1.9, -1.9, -2.0
  - Gross external debt (2019–2026): 57.2, 62.9, 58.4, 56.7, 52.6, 48.2, 43.8, 40.3
  - Gross financing requirement (2019–2026): 22.3, 29.4, 27.6, 25.9, 24.2, 23.0, 21.6, 19.9
- Monetary conditions (selected):
  - Real average cost of CBRT funding to banks: 5.4 (2019), -1.7 (2020)
  - Growth of broad money (M2): 27.3 (2019), 33.9 (2020)
  - Growth of credit to private sector: 10.9 (2019), 34.7 (2020)

### Pandemic initial impact, policy response, and recovery dynamics
- Economic and social impact:
  - GDP fell sharply in 2020Q2; real GDP growth for 2020 as a whole was 1.8 percent.
  - Employment registered its largest fall on record in the first half of 2020; poverty is estimated to have risen by about 1½ million people.
  - Non-financial corporates experienced a steep fall in profits and a further shrinking of equity buffers.
- Monetary, credit, and quasi-fiscal response:
  - CBRT purchased TRY 70 billion (1.4 percent of GDP) of government securities on the secondary market.
  - Rapid and cheap lending by state-owned banks increased the credit gap to an estimated 25 percent of GDP; state-owned banks now account for 45 percent of total banking system assets.
  - Quasi-fiscal measures, including loan guarantees and loan service deferrals by state-owned banks, came to nearly 10 percent of GDP.
- Fiscal response:
  - Direct fiscal support amounted to about 2 percent of GDP.
  - Central government fiscal deficit widened only marginally in 2020, by about ½ percent of GDP.
  - General government debt increased to around 40 percent of GDP.
  - Tax deferrals to businesses amounted to about 1½ percent of GDP, but only affected the overall 2020 deficit by about ½ percent of GDP, as around 70 percent of these had been repaid by 2020Q4.
- Recovery dynamics:
  - Domestic demand registered its highest growth on record in 2020Q3, driven by consumption and investment.
  - By 2020Q3, GDP was already far above its pre-pandemic level; despite a second COVID-19 wave in Q4 activity continued to expand.
  - Staff analysis suggested the output gap was nearly closed by the turn of the year, with remaining slack concentrated in the labor market.

### Reserves, external financing, and reserve quality
- Reserve and FX operations:
  - Net inflows to reserves came to about USD 95 billion during 2020, while net international reserves actually fell by USD 27 billion—implying large FX sales took place in 2020.
  - By September 2020, gross reserves had fallen by more than 25 percent, to around USD 80 billion, or 65 percent of the Fund’s ARA metric for reserves (well below the recommended range of 100-150 percent).
  - External financing needs stood at around USD 210 billion.
  - Domestic FX deposits stood at about USD 230 billion, with the reserves-to-deposit ratio at multi-year lows.
  - Reserve quality deteriorated: roughly sixty percent of reserves consisted of non-SDR basket currencies and gold, compared to under thirty percent before the pandemic.
  - Core NIR that excludes central bank FX liabilities was negative.
- Central bank reserve developments (snapshots):
  - SDR basket FX: 78 72 39 39 (Jan/Dec 2018–2021 snapshot).
  - Non-SDR basket FX: 0 5 15 17 (same snapshot).
  - Gold: 22 24 45 44 (same snapshot).
  - Banks' FX deposits: 94 72 50 48 (Jan/Dec 2018–2021 snapshot).
  - Memo: percent of banks' FX liquid assets in CBRT reserve liabilities: 19 48 51 48.

### Financial sector and corporate vulnerabilities
- Bank sector:
  - State-owned banks account for 45 percent of total banking system assets.
  - Regulatory changes tended to penalize banks with lower lending growth; regulatory flexibility and loan deferrals increased leverage and masked asset quality deterioration.
  - Suggested actions: phase out regulatory flexibility, require intensified monitoring, strengthen prudential standards and provisioning rules, and commission a third-party asset quality review.
- Non-financial corporates (NFCs):
  - NFC debt as a share of total equity rose from 150 to 250 percent over the last decade.
  - Around 20 percent of total debt is FX denominated.
  - Equity buffers declined from 30 to around 20 percent of assets between 2019 and 2020 Q3.
  - The share of firms with negative equity rose from 7 to 13 percent (Orbis) and to 15 to 22 percent (listed firms).
  - Policy options: extend Framework Agreements, revive hybrid restructuring procedures, broaden fiscal incentives for debt write-downs, and increase court capacity.

### Fiscal consolidation, contingent liabilities, and DSA findings
- Fiscal outlook and recommendation:
  - Public debt projected to increase from around 40 to roughly 47 percent of GDP over 2020–26 absent additional consolidation.
  - Authorities should commit to future well-specified consolidation measures equivalent to about 1½ percent of GDP to bring debt down over time.
  - Staff recommends using around 1 percent of GDP in 2021 in additional targeted and temporary support.
- Debt Sustainability Analysis (selected baseline projections):
  - Nominal gross public debt (percent of GDP): 2019: 31.3; 2020: 32.6; 2021: 39.5; 2022: 40.2; 2023: 41.5; 2024: 43.4; 2025: 44.6; 2026: 45.6.
  - Public gross financing needs (percent of GDP): 2019: 7.9; 2020: 8.4; 2021: 10.5; 2022: 12.1; 2023: 12.9; 2024: 13.3; 2025: 13.5; 2026: 13.8.
- Stress-test scenarios (selected outcomes):
  - Primary balance shock: public debt increases moderately to 48 percent of GDP in 2026.
  - Growth shock (1 standard deviation = 3.2 percentage points): debt-to-GDP reaches about 53 percent by 2026; gross financing needs climb to 16 percent of GDP.
  - Interest rate shock (permanent increase in spreads by about 635 basis points): implicit average interest rate about 14 percent over the medium term; debt-to-GDP about 50 percent by 2026; gross financing needs about 16.5 percent.
  - Contingent liability shock (non-interest expenditures increase by 10 percent of GDP in 2022 plus growth shock): debt-to-GDP reaches 66 percent in 2026; gross financing needs about 20 percent.
  - Combined macro-fiscal shock: public debt about 70 percent of GDP; gross financing needs about 21 percent.
  - Combined macro-fiscal-contingent liability shock: public debt breaches the 70 percent benchmark in 2022 and reaches 82 percent of GDP by 2026; gross financing needs around 25 percent.

### Policy menu and structural priorities
- Monetary policy — rebuilding credibility and buffers:
  - Strong commitment to a firm monetary stance; increase policy rate if inflation expectations rise further.
  - Operational simplification and increased transparency, including daily information on FX swaps and weekly reports on international reserves and FX liquidity.
  - Targeted institutional reforms to strengthen central bank independence (reinstating qualification criteria, well-specified dismissal procedures, reviewing transfer rules to the budget).
  - FX reserve purchase auctions to rebuild buffers when conditions permit; limit FX sales to exceptional volatility.
- Fiscal policy — addressing pandemic needs while strengthening the anchor:
  - Use some fiscal space for targeted temporary support in 2021, accompanied by a credible commitment to detailed consolidation measures to be enacted once recovery is entrenched.
  - Strengthen oversight and management of PPPs; publish regular PPP monitoring reports; finalize draft 2019 PPP legislation.
  - Publish comprehensive information on quasi-fiscal operations; mandate regular fiscal risk statements.
  - Debt management: lengthen borrowing maturities; lower reliance on domestic gold instruments and on FX borrowing.
  - Menu of possible medium-term fiscal measures (percent of GDP):
    - (i) Personal Income Tax reform 0.1
    - (ii) Streamline VAT exemptions, raise and unify reduced rates 0.9
    - (iii) Eliminate backward-looking wage indexation 0.3
    - (iv) Contain net lending to public entities 0.2
    - (v) Rationalize ad-hoc transfers/subsidies 0.5
    - (vi) Rationalize investment incentives 0.3
- Banking sector and financial stability:
  - Reign in state-owned bank credit growth; ensure level playing field between state-owned and private banks.
  - Carefully monitor bank FX liabilities; enforce FX liquidity coverage ratios.
  - Reverse regulatory flexibility gradually; encourage use of capital and liquidity buffers for provisioning.
  - Commission a third-party asset quality review and new stress tests.
- Labor market and structural reforms:
  - Support youth employment and female labor force participation.
  - Increase labor market flexibility with accompanying support; restructure viable firms and wind down unviable firms.
  - Short-term measures: focus short-term job retention scheme on viable jobs; increase compensation for compulsory unpaid leave; temporarily ease unemployment insurance eligibility and increase duration/size.

### Social and labor market impacts
- Employment:
  - Employment registered its largest fall on record in 2020Q2; much of the decline reflected a sharp drop in labor force participation.
  - Youth unemployment: one in every four young Turkish workers is now unemployed.
  - Female labor force participation: 32 percent; male rate: 69 percent.
- Poverty:
  - World Bank estimates over 1½ million people were pushed below the poverty line in 2020.
- Policy response:
  - Short-Term Work Allowance (STWA), unemployment insurance, wage subsidies, lump-sum transfers, and a temporary ban on layoffs; overall labor market support characterized as broad but small in scale.

### Risk Assessment Matrix — selected risks and policy responses
- Widespread social discontent and political instability:
  - Likelihood: High
  - Policy recommendations: Expedite vaccination; provide additional temporary and targeted fiscal support.
- Intensified geopolitical tensions and security risks:
  - Likelihood: High
  - Policy recommendations: Tighten monetary policy; allow automatic fiscal stabilizers; limit FX intervention given low reserves; domestic action and international support for refugees.
- Disorderly macro-financial deleveraging and income compression:
  - Likelihood: High
  - Policy recommendations: Tighten monetary policy; limit FX intervention; third-party asset quality review followed by stress tests; promote out-of-court debt workouts; adopt medium-term fiscal plan.

_International Monetary Fund — Turkey: Selected Findings and Policy Recommendations (excerpts) (Content unit 1turea2021001)._

### 2020. Some fiscal space remains available, albeit somewhat limited by contingent liabilities

### 2020. Some fiscal space remains available, albeit somewhat limited by contingent liabilities

### Recent developments and vulnerabilities
- Growth rebound: Rapid money growth and credit provision by state-owned banks, and extensive liquidity support contributed to a sharp activity rebound in the second half of 2020.
- Inflation and exchange rate pressures:
  - Higher inflation and increased dollarization increased pressure on the lira.
  - The lira stands nearly 40 percent below its pre-pandemic level.
- Reserves and external positions:
  - Heavy foreign exchange sales led to steep reserve declines from already-low levels.
  - Gross reserves are well below the recommended adequacy range.
  - Net international reserves are negative once foreign exchange swaps with the central bank are subtracted.
- Balance sheet strains:
  - Lira depreciation added to non-financial corporate and bank balance sheet strains.
- Policy shift and credibility:
  - A shift towards a firm monetary policy stance since the Fall was initially well received but its durability was called into question following central bank leadership change in March 2021; the lira weakened markedly and interest rate spreads widened.
- Pandemic impact: As of late-April (2021), more than 4 million COVID-19 cases had been reported in Turkey, with over 36 thousand fatalities. Vaccination started in January 2021, with 6 and 9 percent of the population partially and fully vaccinated by late April. Authorities target vaccinating around 60 percent of the population by Autumn 2021.

### Outlook and risks
- Growth projection:
  - Growth should reach about 5¾ percent in 2021, mainly reflecting a large positive carryover from the sharp rebound in H2 2020, before returning to a lower trend from 2022 onwards.
- Inflation and reserves:
  - Inflation is expected to remain high.
  - Reserves are expected to decline further.
- Vulnerabilities and risk drivers:
  - High external financing needs, sizeable domestic foreign exchange deposits, and low reserve buffers increase vulnerability to shocks and sentiment shifts.
  - Domestic risks: premature relaxation of monetary and credit policies or other policy missteps that further erode credibility and buffers.
  - External risks: interest rate increases in advanced economies and higher global risk aversion that could expose vulnerabilities.
  - Other risks: vaccination delays and adverse geopolitical developments.

### Executive Board assessment and policy recommendations
- Commendation and concerns:
  - Directors commended Turkey for the remarkable recovery but noted that policies that supported the recovery also fueled inflation and external imbalances, and exacerbated pre-pandemic vulnerabilities (low reserves, large external financing needs, and dollarization).
- Monetary policy:
  - Strongly commit to, and deliver, a firm monetary policy stance to bring inflation towards target.
  - Welcome the shift toward tighter policy and encourage further timely and well-calibrated tightening if inflation expectations increase further.
  - Emphasize strengthening central bank independence, rebuilding high-quality reserves, simplifying the operational framework, and improving policy communication.
- Fiscal policy:
  - Noting relatively tight fiscal targets for 2021, see scope for additional targeted and temporary support in 2021 to help vulnerable sections of society and minimize scarring.
  - Such support should be accompanied by a credible consolidation plan to lower debt over time, to be legislated now and enacted when the recovery is entrenched.
  - Some Directors supported firm fiscal restraint to reduce persistent imbalances and boost policy credibility.
  - Encourage strengthening debt management, better monitoring of quasi-fiscal operations and extra budgetary institutions, and enhancing fiscal transparency.
- Financial sector:
  - Further reining in and refocusing state-owned bank credit growth; carefully monitor bank foreign exchange liabilities.
  - Gradually reverse regulatory flexibility and loan deferrals as the pandemic recedes.
  - Once the pandemic fades, a third-party asset quality review would help better understand underlying bank health.
  - Additional reforms to strengthen regulatory, resolution, and AML/CFT frameworks to support financial stability.
- Structural reforms:
  - Focus on female labor force participation and youth employment, increase labor market flexibility, ensure viable but temporarily insolvent firms are restructured while winding down unviable firms.

### Key statistics and projections (selected)
- Population (2020): 83.6 million
- Per capita GDP (2020): US$8,562
- Quota: SDR 4,658.6 million
- Real GDP growth rate:
  - 2019: 0.9
  - 2020: 1.8
  - 2021 (Proj.): 5.8
  - 2022–2026 (annual proj.): 3.3, 3.3, 3.3, 3.3, 3.3
- Contributions to real GDP growth (selected):
  - Private consumption (2019–2026): 0.9, 1.7, 3.4, 1.5, 1.8, 1.9, 2.1, 2.2
  - Investment (incl. inventories) (2019–2026): -3.8, 7.1, -3.3, 0.4, 1.5, 1.4, 1.2, 1.3
  - Net exports (2019–2026): 3.2, -7.3, 5.3, 1.0, -0.5, -0.4, -0.5, -0.7
- Output gap (2019–2026): -0.8, -2.2, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
- GDP deflator growth rate (2019–2026): 13.9, 14.3, 20.4, 11.4, 11.0, 11.5, 12.4, 12.2
- Inflation (period-average, 2019–2026): 15.2, 12.3, 16.9, 14.9, 12.8, 12.5, 12.5, 12.5
- Inflation (end-year, 2019–2026): 11.8, 14.6, 16.5, 14.0, 12.5, 12.5, 12.5, 12.5
- Unemployment rate (2019–2026): 13.7, 13.2, 12.5, 11.0, 10.5, 10.5, 10.5, 10.5
- Fiscal sector (Percent of GDP):
  - Nonfinancial public sector overall balance (2019–2026): -5.8, -5.4, -6.1, -6.3, -6.5, -6.5, -6.6, -6.7
  - General government overall balance (headline) (2019–2026): -3.7, -4.5, -5.7, -6.0, -6.2, -6.2, -6.3, -6.4
  - General government gross debt (EU definition) (2019–2026): 32.6, 39.5, 40.2, 41.5, 43.4, 44.6, 45.6, 46.5
- External sector:
  - Current account balance (2019–2026): 0.9, -5.1, -2.7, -1.7, -1.8, -1.9, -1.9, -2.0
  - Gross external debt (2019–2026): 57.2, 62.9, 58.4, 56.7, 52.6, 48.2, 43.8, 40.3
  - Gross financing requirement (2019–2026): 22.3, 29.4, 27.6, 25.9, 24.2, 23.0, 21.6, 19.9
- Monetary conditions (selected):
  - Real average cost of CBRT funding to banks: 5.4 (2019), -1.7 (2020)
  - Growth of broad money (M2): 27.3 (2019), 33.9 (2020)
  - Growth of credit to private sector: 10.9 (2019), 34.7 (2020)

*May 13, 2021, IMF staff report.*

### 4.      The initial economic and financial impact of the pandemic was acute. GDP fell sharply in

### 4.      The initial economic and financial impact of the pandemic was acute. GDP fell sharply in

### Initial economic and social impact
- GDP fell sharply in the second quarter of 2020 as containment measures, collapsing external demand, and a plunge in tourism activity hit the economy.
- Employment registered its largest fall on record in the first half of 2020, with a similar decline in labor force participation, muting recorded unemployment increases.
- Poverty is estimated to have risen by about 1½ million people as a result of the pandemic.
- The pandemic hit Turkey’s large refugee population hard.
- Non-financial corporates experienced a steep fall in profits and a further shrinking of equity buffers.
- Household balance sheets, already strong, were less affected, while lower economic growth and lira depreciation worsened bank balance sheets.

### Monetary, credit, and quasi-fiscal policy response
- The policy response relied initially on rapid monetary and credit expansion, and on extensive liquidity support, setting Turkey apart from most peers.
- The Central Bank of the Republic of Turkey (CBRT) continued lowering policy rates which, with rising inflation expectations, turned real rates negative.
- The CBRT purchased TRY 70 billion (1.4 percent of GDP) of government securities on the secondary market.
- Rapid and cheap lending by state-owned banks increased the credit gap to an estimated 25 percent of GDP, with state-owned banks now accounting for 45 percent of total banking system assets.
- Base money and credit rose sharply, outpacing most peers.
- Regulatory changes (a new Asset Ratio and changes to reserve requirements) tended to penalize banks with lower lending growth.
- Quasi-fiscal measures, including loan guarantees to firms and loan service deferrals by state-owned banks, came to nearly 10 percent of GDP (among the highest in emerging markets).

### Fiscal response and public finances
- Direct fiscal support was modest: spending on healthcare and on direct support to households, firms, and employees amounted to about 2 percent of GDP, among the lowest in emerging markets.
- Reflecting modest spending and stronger-than-expected revenues, the central government fiscal deficit widened only marginally in 2020, by about ½ percent of GDP, and the estimated direct fiscal impulse was negative.
- Revenues were helped by strong value added and special consumption tax revenues, large transfers from the CBRT, and high interest receipts.
- General government debt increased to around 40 percent of GDP, but remained low compared to most peers.
- Tax deferrals to businesses amounted to about 1½ percent of GDP, but only affected the overall 2020 deficit by about ½ percent of GDP, as around 70 percent of these had been repaid by 2020Q4.
- Some pandemic-related spending was financed by drawing on the assets of the Unemployment Insurance Fund, limiting the impact on gross public debt.

### Growth outcome and recovery dynamics
- Turkey was among the few countries with positive growth in 2020.
- Domestic demand registered its highest growth on record in 2020Q3, driven by consumption and investment.
- By 2020Q3, GDP was already far above its pre-pandemic level; despite a second COVID-19 wave in Q4 activity continued to expand.
- Real GDP growth for 2020 as a whole was 1.8 percent.
- Recent data suggested growth momentum remained positive in early 2021.
- Staff analysis suggested the output gap was nearly closed by the turn of the year, with remaining slack concentrated in the labor market.

### Inflation, exchange rate, and financial vulnerabilities
- Loose monetary policy meant inflation remained in double digits, well above the 5 percent target.
- Central bank credibility weakened and confidence in the lira declined; the lira depreciated by nearly 40 percent from January to October 2020.
- Dollarization increased, reaching almost 60 percent of bank deposits.
- Increased lending and regulatory flexibility raised corporate leverage and worsened bank and corporate balance-sheet vulnerabilities.

### External imbalances and external financing
- Excess money and the domestic demand rebound fed into increased demand for foreign goods and assets, pressuring the current account.
- Exports, notably tourism, suffered a sharp decline while imports recovered with domestic demand; gold imports surged.
- The current account moved from a surplus in 2019 to a large deficit in 2020.
- Turkey’s external financing quality worsened: increased reliance on short-term funding, a slowdown in net FDI inflows, and net portfolio outflows through much of 2020.
- The real effective exchange rate was estimated to have been undervalued by around 15–25 percent (with high uncertainty around estimates).

### Reserves, FX operations, and reserve quality
- Based on publicly-available information and staff estimates, net inflows to reserves came to about USD 95 billion during 2020, while net international reserves actually fell by USD 27 billion—implying large FX sales took place in 2020.
- The FX position of state-owned banks deteriorated to a large negative overall position by August 2020 before closing again in late 2020.
- By September 2020, gross reserves had fallen by more than 25 percent, to around USD 80 billion, or 65 percent of the Fund’s ARA metric for reserves (well below the recommended range of 100-150 percent).
- External financing needs stood at around USD 210 billion.
- Domestic FX deposits, not included in external financing needs, stood at about USD 230 billion, with the reserves-to-deposit ratio at multi-year lows.
- Reserve quality deteriorated: roughly sixty percent of reserves consisted of non-SDR basket currencies and gold, compared to under thirty percent before the pandemic.
- Reserves were almost entirely owed to banks in the form of deposits at the central bank and swaps, making a measure of “core” NIR that excludes central bank FX liabilities negative.

### Policy shift, operational changes, and aftermath
- From August 2020 the CBRT started providing liquidity through more expensive facilities and tightened reserve requirements; FX sales slowed gradually and lending by state-owned banks was reined in.
- Much tightening was implemented through a complex interest rate corridor framework.
- Following lira lows in early November and senior appointments, the CBRT simplified its operational framework by adopting the one-week repo rate as its main policy instrument.
- The CBRT hiked the policy rate from 10.25 to 17 percent by December 2020, and then to 19 percent in March 2021, and strengthened monetary policy communication with clearer forward guidance.
- Administrative measures were eased, including dropping the Asset Ratio and the lending incentives in the reserve requirement framework and loosening restrictions on FX swaps between local banks and foreign counterparts.

### Economic Reform Program (ERP) and policy priorities
- The authorities announced a new ERP in March 2021 to complement the monetary policy shift; the ERP included elements from past plans.
- ERP stated objectives: promote macroeconomic stability, boost productivity, and strengthen governance.
- Key ERP measures include:
  - Fiscal reforms: greater spending discipline; reform of public procurement tenders; stronger public debt management; a simplified and more investor-friendly and predictable taxation regime; enactment of the PPP framework law; state-owned enterprise reform.
  - Institutional: a new Price Stability Committee coordinated by the Ministry of Treasury and Finance, comprising the CBRT and several ministries and agencies.
  - Financial sector reforms: operational restructuring and firm rehabilitation units in banks; removal of nonperforming loans through securitization; measures to promote equity financing in non-financial corporates; a Bond Guarantee Fund to help with corporate issuance.
  - Measures to lower the current account deficit: restructure the Credit Guaranteed Fund to focus on high value-added investment, job-rich production, manufacturing prioritizing import substitution and exports in less developed regions.
  - Employment measures: promote youth employment; reductions in social security and unemployment insurance contributions for new hires.
  - Governance and institutional measures: a new Financial Stability Committee and Economy Coordination Board with monthly reporting; TURKSTAT to be given the status of a "related institution," legally autonomous; more stringent qualification criteria for senior public service appointments.
- The Fund staff noted that while many ERP objectives are reasonable, some components (including the new Price Stability Committee) are less obvious; the plan could benefit from a clearer diagnosis of key challenges—low reserves, mounting dollarization, and high external financing needs—and further elaboration of policy measures to address them to help policy credibility.

### Durability, market reaction, and risks
- The November policy shift was initially well received: sizable portfolio inflows, narrower spreads, and a sharp lira appreciation followed.
- Domestic resident reaction was muted: deposit dollarization remained at historic highs.
- Policy uncertainty resurfaced after the unexpected change of CBRT Governor in March 2021 and the use of more dovish forward guidance; inflation expectations shifted further upwards.
- Most financial market gains made after November were unwound, with a weaker lira and wider spreads.
- Outlook described as “highly uncertain, with significant risks.”

*Source: IMF staff report (1turea2021001 - 4. The initial economic and financial impact of the pandemic was acute. GDP fell sharply in...)*

### 16.      GDP is expected to grow by 5.8 percent this year, mainly because of positive carryover,

### 1turea2021001 - 16.      GDP is expected to grow by 5.8 percent this year, mainly because of positive carryover,

### Growth, inflation, and balance-sheet outlook
- GDP is expected to grow by 5.8 percent in 2021, mainly because of positive carryover, and to revert to a lower trend from 2022 onwards (about 3¼ percent from 2022 onwards).
- Inflation is expected to remain well above target in 2021 and to fall only gradually thereafter, reflecting exchange rate passthrough, higher commodity prices, the latest minimum wage hike, inflation inertia, still-robust credit growth, and policy credibility challenges.
- Staff assumes no significant change in interest rates in the near term and some fiscal easing in 2021 under the baseline.
- Domestic demand is expected to slow during 2021, driven by previous monetary policy tightening and increased policy uncertainty; heightened uncertainty continues to weigh on domestic demand even as the impact of higher interest rates gradually fades.
- The current account deficit is forecast to narrow as exports improve despite a sluggish tourism recovery, supported by the weaker exchange rate and stronger trading partner growth.
- Reserve buffers are expected to decline further, with considerable uncertainty over the outlook for gold and oil imports, tourism receipts, and external financing.
- Public debt is expected to continue growing but to stay low compared to most peers.

### Key indicators (Turkey: Selected Economic Indicators, 2019–26)
- GDP Growth: 0.9, 1.8, 5.8, 3.3, 3.3, 3.3, 3.3
- Inflation (end-year): 11.8, 14.6, 16.5, 14.0, 12.5, 12.5, 12.5, 12.5
- Current account balance (Percent of GDP): 0.9, -5.1, -2.7, -1.7, -1.8, -1.9, -1.9, -2.0
- Fiscal balance 1/ (Central government overall balance, Percent of GDP): -2.9, -3.4, -5.0, -5.3, -5.5, -5.5, -5.6, -5.8
- Public debt (Percent of GDP): 32.6, 39.5, 40.2, 41.5, 43.4, 44.6, 45.6, 46.5

### Vulnerabilities and downside risks
- Vulnerabilities remain high; buffers are lower than before the pandemic. “Core” net reserves are negative, while external financing needs and domestic FX deposits have increased.
- The highly-indebted NFC sector will need to deleverage in coming years, with a likely uptick in debt restructurings and insolvencies.
- Downside risks have intensified and the outlook is unusually uncertain. Key risks include:
  - Uncertainty about external financing and the direction of policies, increasing the downside skew and widening confidence bands around forecasts.
  - Premature relaxation of monetary and credit policies that erode credibility and buffers.
  - Interest rate increases in advanced economies and higher global risk aversion, leading to higher risk premia and tighter financing conditions.
  - Vaccination delays or declines in efficacy and adverse geopolitical developments.
- If downside risks materialize, possible outcomes include higher risk premia, significantly tighter financing conditions, a weaker exchange rate, lower growth, higher inflation, and a sharper current account correction.
- In an alternative scenario with looser domestic financial conditions without increased risk aversion, growth, inflation, and the current account deficit could all end up higher than projected.

### External spillovers
- Realization of risks in Turkey would likely lead to moderate outward spillovers via:
  - Trade links with neighbors (e.g., Azerbaijan).
  - Remittances (Montenegro, Bulgaria).
  - Financial exposures through portfolio flows (Malta, Luxembourg, Bahrain) and direct investment (Azerbaijan).
  - Bank lending exposures linked to some euro area financial institutions holding equity stakes in Turkish banks (e.g., Spain).
- A severe episode of financial dislocation could affect other vulnerable emerging markets through confidence channels, though most observers see Turkey’s difficulties as idiosyncratic.

### Policy recommendations — overarching approach
- Authorities should strongly commit to, and deliver, a firm policy stance to rebuild credibility and buffers while continuing to respond to the human and economic needs arising from the pandemic.
- A sustainable policy package should combine:
  - A strongly committed and delivered firm monetary stance—with no premature easing and further timely and well-calibrated tightening if inflation expectations rise further.
  - Formalization and simplification of the CBRT’s operational framework.
  - Prudent credit policies and the unwinding of remaining administrative measures as conditions allow.
  - Temporary and targeted fiscal spending in 2021 to address pandemic-related needs, accompanied by a credible commitment now to detailed fiscal consolidation to be enacted once the recovery is entrenched.
  - Over time, priority should be given to rebuilding buffers from current low levels.
  - Policies to shift focus from preserving jobs and firms to facilitating labor and capital mobility to minimize long-term scarring, including supporting female labor force participation and youth employment, increasing labor market flexibility with accompanying support, restructuring viable but temporarily weakened firms, and winding down non-viable firms.

### Monetary policy — rebuilding credibility and buffers
- Restoring central bank credibility, bringing inflation towards target, and rebuilding reserves require:
  - Strong commitment to, and delivery of, a firm monetary stance; increasing the policy rate if inflation expectations increase further.
  - A transparent FX reserve accumulation strategy should conditions allow in the future.
- The initial pandemic response de-anchored inflation expectations and strained the lira, balance of payments, reserves, and financial stability; late 2020/early 2021 monetary tightening was welcome given a real neutral interest rate of about 3–4 percent and a nearly closed output gap.
- Market developments following the change in central bank leadership in March 2021 added to vulnerabilities; real interest rates will need to remain higher than the neutral rate for longer to durably lower inflation and rebuild reserve buffers and credibility.
- If inflation expectations increase further, the central bank should react promptly by hiking its policy rate to, at a minimum, keep the ex-ante real policy rate unchanged.
- Operational simplification and increased transparency should continue, including daily information on FX swaps and weekly reports on international reserves and FX liquidity.
- Targeted institutional reforms to strengthen central bank independence are needed, including:
  - Reinstating previous qualification criteria for appointments.
  - Adherence to well-specified procedures for dismissing central bank board members, including the Governor.
  - Strengthening the CBRT’s financial autonomy by reviewing rules governing transfers to the budget.
- Should conditions permit, FX reserve purchase auctions should be used to rebuild buffers; further FX sales should be limited to exceptional market volatility cases. Export rediscount credits, a more opaque reserve-building method, could be gradually discontinued.
- Phasing out administrative measures aimed at supporting the lira would reduce distortions and encourage investment; easing limits on FX swaps and eliminating remaining repatriation requirements for export proceeds are recommended over time, with careful sequencing to minimize market dislocation and financial stability risks. New import tariffs should be reversed.

### Fiscal policy — addressing pandemic needs while strengthening the anchor
- Turkey has some fiscal space; part should be used to provide additional support to those most affected by the pandemic and to help minimize scarring.
- Near-term fiscal support should be accompanied by a credible commitment now to future, well-specified consolidation measures.
- Reforms are needed to improve transparency and control of quasi-fiscal activity and contingent liabilities.
- The authorities’ revised targets envisage maintaining the central government budget deficit in 2021 at 2020 levels. Staff’s baseline assumes a looser stance given expected declines in non-tax revenues, pandemic uncertainty, and historic performance relative to NEP targets.
- Staff recommends using around 1 percent of GDP in 2021 in additional targeted and temporary support to address pandemic-related needs, notably to support vulnerable households and workers and to minimize scarring.
- Transparency could be enhanced by publishing beneficial ownership information of companies awarded pandemic procurement contracts.
- Financing fiscal support measures through the Unemployment Insurance Fund should be strictly limited.

### Trade-offs and expected outcomes
- The recommended policy response entails short-term trade-offs: tighter monetary and credit policies would likely accelerate deleveraging and temporarily reduce demand, requiring a looser near-term fiscal stance targeted at the most vulnerable; structural reforms may have near-term costs as resources reallocate.
- Over the medium and long term, the rebalanced framework is expected to deliver:
  - Sustainably lower interest rates.
  - A stronger lira.
  - Faster and more durable disinflation.
  - Higher reserves.
  - Stronger and more durable growth.
- Illustrative scenario results highlighted include a sustainable decline in interest rates, faster disinflation, a more sustainable debt trajectory, and stronger durable growth.

### Authorities’ views
- The authorities broadly agreed with staff’s baseline on the near-term growth outlook but expected somewhat more favorable growth over the medium term and a more favorable outlook for external financing; they expected inflation to be significantly lower than staff’s baseline.
- The authorities agreed with the need to deliver a firm monetary stance and credit tightening and to strengthen monetary policy operations; they committed to pursue prudent fiscal policy over the medium term to preserve the fiscal anchor and to rebuild reserves.
- Differences with staff include:
  - Authorities favored more frontloaded fiscal tightening with no easing in 2021 and additional support deployed only if needed.
  - Authorities were more sanguine on downside risks from bank and corporate balance sheets.
  - Authorities identified different reform priorities though they agreed on the need for focused reforms to support medium-term growth.

*Source: IMF staff calculations and analysis as presented in the supplied content.*

### 34.       A credible and detailed fiscal consolidation plan should be announced at the same

### 1turea2021001 - 34.       A credible and detailed fiscal consolidation plan should be announced at the same

### Fiscal outlook and consolidation recommendation
- Public debt is projected to increase under the baseline, from around 40 to roughly 47 percent of GDP, over 2020–26 and gross financing needs are also projected to increase.
- The authorities should commit to future well-specified consolidation measures equivalent to about 1½ percent of GDP to bring debt down over time.
- Absent additional consolidation measures, staff’s baseline projects the general government primary deficit (IMF program definition) to settle at around 3 percent of GDP over the medium term, compared to a debt-stabilizing primary deficit of about 2 percent of GDP.

### Fiscal structural reforms and fiscal governance
- Strengthen oversight and management of Public Private Partnerships (PPPs) by:
  - publishing regular PPP monitoring reports;
  - finalizing draft 2019 PPP legislation as committed in the March 2021 Economic Reform Program;
  - giving the Ministry of Treasury and Finance the mandate to manage fiscal costs and risks at all PPP project stages.
- Publish regular comprehensive information on the quasi-fiscal operations of all state-owned enterprises and assess contingent liability risks arising from the pandemic policy response.
- Charge the Ministry of Treasury and Finance with monitoring and assessing fiscal risks and publishing regular fiscal risk statements.
- Continue to strengthen budget execution, including introducing supplementary budgets when needed, to enhance public financial management.

### Extra-budgetary entities and the Turkey Wealth Fund
- Carefully define and monitor the scope and role of extra-budgetary funds and other non-central government entities.
- Integrate investment and borrowing by the Turkey Wealth Fund into the budget and have its financial statements audited by the Court of Accounts.
- Refine the governance framework of the Turkey Wealth Fund to limit potential conflicts of interest.

### Debt management
- Build on earlier moves to address rollover and currency risks by:
  - lengthening borrowing maturities;
  - lowering reliance on domestic gold instruments and on FX borrowing.
- The Ministry of Treasury and Finance should reduce its reliance on domestic gold and FX borrowing.

### Turkey: Menu of Possible Medium-Term Fiscal Measures (Percent of GDP)
- Possible consolidation options — Revenue
  - (i) Personal Income Tax reform (collection, progressivity) 0.1
  - (ii) Streamline VAT exemptions, raise and unify reduced rates 0.9
- Possible consolidation options — Expenditure
  - (iii) Eliminate backward-looking wage indexation 0.3
  - (iv) Contain net lending to public entities 0.2
  - (v) Rationalize ad-hoc transfers/subsidies 0.5
  - (vi) Rationalize investment incentives 0.3

### Authorities’ views on fiscal policy
- Authorities agreed they had fiscal space that could be used if needed, but favored a more frontloaded fiscal consolidation than staff.
- They judged their revised 2021 deficit target to be appropriate and planned to continue to pursue prudent fiscal policy over the medium term to preserve the fiscal anchor.
- They saw the benefit of better monitoring and managing fiscal risks from state-owned enterprises, PPPs, and extra-budgetary funds and planned to prepare a fiscal risk assessment in due course.
- They reported progress in integrating PPPs with the public investment management framework (including PPP projects in the public investment database) and developing a value-for-money model for project appraisal.
- They agreed with the need to continue to lengthen borrowing maturities and to reduce reliance on domestic FX debt.

### Financial sector — reining in credit growth and strengthening balance sheets
- State-owned bank credit growth should be reined in further; focus over time on meeting identified market gaps.
- Ensure a level playing field between state-owned and private banks; any implied subsidies by state-owned banks should be treated transparently in the budget.
- As the pandemic subsides, new lending through the Credit Guarantee Fund should be restricted to small and medium-sized enterprises, in line with its original mandate.
- Bank FX liquidity risks warrant careful monitoring:
  - continue to strictly enforce FX liquidity coverage ratios;
  - ensure state-owned bank open FX positions are kept within regulatory limits and that such banks abstain from FX intervention;
  - assess banks’ FX liquidity risks at the Financial Stability Committee level;
  - strengthen bank resolution frameworks, including through amending relevant legislation.

### Regulatory flexibility, provisioning, and capital buffers
- Reverse regulatory flexibility gradually and require intensified monitoring, with banks continually assessing borrowers’ creditworthiness until conditions normalize.
- Strengthen prudential standards and provisioning rules as the pandemic eases to promote timely recognition of loan losses.
- BRSA should phase out regulatory flexibility over time and discourage loan deferrals and evergreening.
- Encourage banks to use some of their capital and liquidity buffers as required to make room for further provisioning of impaired assets.
- Continue to restrict easing of capital distribution restrictions; relieve only gradually under pre-agreed parameters and where forward-looking assessment of capital adequacy is confirmed by supervisors.
- Enact proposed revisions to the Banking Law to strengthen BRSA independence soon.
- Commission a third-party asset quality review and undertake new stress tests based on the outcome to identify measures to rebuild capital as needed.

### Distressed asset market — menu of possible policy options
- Incentives for banks and third-party specialists:
  - Rule out adverse tax implications for banks selling distressed assets to third-parties.
  - Improve securitization, tax and debtor notification/approval rules to help efficient disposal and transfer of distressed assets.
- Transparency rules:
  - Develop standardized data templates to reduce market entry costs and creditor/buyer information asymmetries.
  - Adjust bank secrecy, data protection, and consumer protection rules to ensure fair and consistent treatment for debtors and creditors.
- Investment design and competition:
  - Set up third-party and time-limited special purpose vehicles (SPVs) that are “bankruptcy remote,” with flexible and self-liquidating repayment schedules.
  - Allow SPVs to be funded by financing instruments tailored to accommodate investor risk appetites.
  - Allow “upside sharing” between investors and the bank selling distressed assets.
  - Encourage asset management companies to participate in SPVs to align interests and help ensure a more competitive secondary market.

### Cryptocurrency and AML/CFT vigilance
- Cryptocurrency trading volumes have grown rapidly; authorities banned cryptocurrency payments and are developing a regulatory framework to eliminate counterparty risk in crypto-asset trading and to set appropriate capital requirements for crypto-asset exchanges.
- Building on progress to date, further work is needed to strengthen Turkey’s AML/CFT framework to avoid “grey listing” and pressures on corresponding banking relationships.
- Effective implementation is needed to address shortcomings related to politically-exposed persons and to ensure targeted financial sanctions are implemented without delay.
- Authorities committed to further progress on AML/CFT measures and requested that the FSAP be brought forward to 2021.

### Labor market and structural policies to mitigate scarring
- Structural policies should focus on supporting youth employment and female labor force participation, increasing labor market flexibility, and ensuring viable but temporarily-insolvent firms are restructured while winding down unviable firms.
- Additional targeted labor market support:
  - Until mobility restrictions are eased durably, increase focus of the short-term job retention scheme on viable jobs and hardest-hit sectors.
  - Increase compensation for compulsory unpaid leave.
  - Temporarily ease eligibility criteria for and increase the duration and size of unemployment insurance.
  - To aid labor mobility, consider severance pay reform and/or adopting the ILO convention on temporary employment and private employment agencies.
  - Gradually remove layoff ban and increase targeted hiring subsidies as mobility restrictions ease.
- Policies focused on the young, women, and the most vulnerable:
  - Increase coverage, size, and frequency of lump-sum transfers under the non-contributory social assistance programs.
  - Enact secondary legislation to allow flexible work arrangements, especially part-time working.
  - Review employment policies that hinder the hiring of female and young workers.
  - Expand affordable childcare as mobility restrictions ease.
  - Strengthen active labor market policies focusing on digitalization and skill-building, particularly among the young (only around 10 percent of workers in Turkey can work from home).
- Clear sunset clauses are needed for many measures to prevent later rigidities.

### Non-financial corporates — targeted support to minimize corporate debt distress
- Turkish non-financial corporates were vulnerable before the pandemic, with high leverage, partially-hedged foreign exchange exposures, and stagnant profits.
- Temporary and targeted fiscal support measures could include:
  - Extend tax deferrals for hard-hit sectors and develop a transparent, incentive-compatible mechanism to write down tax obligations for temporarily insolvent but viable firms (covering both in- and out-of-court restructurings).
  - Better target loan guarantees at hard-hit sectors, with banks responsible for allocating the loans to leverage firm-specific knowledge and align incentives.

*Source: IMF staff calculations.*

### 51.      Carefully-calibrated policies could also help with corporate debt resolution. Such policies

### 1turea2021001 - 51.      Carefully-calibrated policies could also help with corporate debt resolution. Such policies

### Corporate debt resolution: objectives and priorities
- Navigate the trade-off between preserving value and releasing resources for more productive uses.
- Allow viable but temporarily-insolvent firms to restructure quickly, while putting unviable firms into orderly liquidation.
- Priorities:
  - (i) increasing the capacity and flexibility of the system to deal with restructuring.
  - (ii) setting up triaging to direct enterprises to the appropriate resolution procedure.

### Menu of possible policy options to support corporate restructuring and minimize scarring
- Out of court/hybrid measures
  - Extend the regulations governing Framework Agreements, currently scheduled to expire at end-2021, until a permanent legislative solution is identified.
  - Revive (with modifications, if needed) the ‘Restructuring Upon Settlement’ rules designed to allow hybrid procedures, where courts intervene only at key decision points during simple restructurings.
  - Encourage foreign creditors to join Framework Agreements by allowing them to join arbitration bodies and ensuring viability assessments are conducted independently.
  - To support ‘triaging’, the BRSA could provide guidance to banks on how to conduct firm viability assessments and encourage bank workout units to follow specific procedures based on pre-defined debtor characteristics.
- Changes to the formal insolvency regime
  - Secured creditors should be integrated more fully into the Concordat (the court-led, pre-bankruptcy, debt restructuring mechanism) by allowing them to be subject to ‘cram-downs’ and by providing more flexibility in treatment between creditors.
  - Reduce the maximum stay on creditors offered under the Concordat from up to 30 months to below 12 months. Eliminate the assumption of almost automatic issuance and extension of stays by courts.
  - New financing provided during a restructuring should be given explicit protection relative to existing debt.
  - Introduce flexible regulation for survival of all essential contracts, i.e., those necessary for the continuation of the day-to-day operations, such as utilities or internet.
  - Exempt bank officials from criminal liability in a court sanctioned Concordat plan and all restructuring deals, not just those agreed in the Framework Agreements, apart from cases of clear breaches of the law.
- Other measures
  - Fiscal incentives for debt write-downs should be broadened to include all restructuring agreements.
  - Increase the capacity of courts to deal more efficiently with enforcement and insolvency cases.
  - Stronger coordination between all relevant government bodies (Ministry of Justice, Ministry of Treasury and Finance, regulators).

### Authorities’ views on corporate insolvency risks
- Authorities acknowledged corporate insolvency risks, but underscored other positive developments and policy improvements.
- They did not expect a significant wave of restructurings and bankruptcies as a result of the pandemic.
- Highlighted improvements:
  - Improvement in the net open FX positions of firms since early 2018.
  - Growing short term long FX position, partly attributed to policy measures limiting borrowing in foreign currency.
  - Ongoing review of Turkey’s insolvency regime expected to better balance debtor and creditor rights, speed up insolvency proceedings, and reduce costs.

### Broader structural reforms (medium term)
- Objective: support strong durable growth by addressing rigidities and strengthening business environment and education quality.
- Key reform areas:
  - Product market reforms: simplify business entry and exit; address administrative and regulatory barriers to competition to increase productivity and encourage FDI.
  - Governance reforms: improve regulatory predictability, simplify administrative procedures, reduce corruption vulnerabilities.
- Expected payoff: improve business climate and economic efficiency, underpinning stronger and more durable growth.

### Staff appraisal: macroeconomic context, risks, and policy recommendations
- Pre-pandemic vulnerabilities
  - Growth prior to 2020 driven by externally-funded demand stimulus; large current account deficits financed mainly by debt.
  - Rapid credit growth and high inflation undermined monetary policy credibility and fueled deposit dollarization.
  - Resulted in large reserve losses; Turkey entered the pandemic with lower buffers than most peers.
- Pandemic response and outcomes
  - Initial policy response relied on rapid monetary and credit expansion, and extensive liquidity support (large interest rate cuts, state-owned banks, administrative and regulatory credit incentives, loan guarantees and loan service deferrals).
  - Direct fiscal support was relatively modest despite some fiscal space.
  - GDP rebound: growth should reach 5¾ percent this year, reflecting large positive carryover from the sharp activity rebound in second half of 2020.
  - Absent additional reforms, projected return to trend growth of about 3¼ percent a year from 2022 onwards; inflation expected to remain high; reserve buffers to decline further.
- Risks
  - Downside risks intensified due to low reserve buffers, high external financing needs, and sizeable domestic foreign exchange deposits.
  - Domestic risk: premature relaxation of monetary and credit policies or other policy missteps.
  - External risks: interest rate increases in advanced economies and higher global risk aversion.
  - Other risks: vaccination delays and adverse geopolitical developments.
- Recommended policy package
  - Monetary policy
    - Focus on restoring credibility and bringing inflation towards target.
    - Any premature easing should be avoided; further timely and well-calibrated tightening needed if inflation expectations increase further, to, at a minimum, keep the ex-ante real policy rate unchanged.
    - Commitment to a firm monetary stance would allow earlier subsequent rate cuts and help rebuild reserves, especially if combined with reforms to strengthen central bank independence and credibility.
  - Fiscal policy
    - Some fiscal space should be used to address pandemic-related needs, alongside a commitment to future consolidation.
    - Additional targeted and temporary fiscal support of around 1 percent of GDP should be deployed this year to support the most vulnerable and help minimize scarring.
    - A credible fiscal consolidation plan to lower debt over time should be legislated now and enacted when the recovery is entrenched.
    - Strengthen debt management policies, implement targeted fiscal structural reforms, and enhance monitoring of quasi-fiscal operations and extra budgetary institutions.
  - Banking sector and financial stability
    - Reign in state-owned bank credit growth and refocus lending to identified market gaps.
    - Carefully monitor bank foreign exchange liabilities.
    - Reverse regulatory flexibility and loan deferrals gradually; use some banks’ capital buffers as needed.
    - Conduct a third-party asset quality review as the pandemic fades, and strengthen regulatory, resolution, and AML/CFT frameworks.
  - Structural reforms to minimize scarring
    - Support female labor force participation and youth employment.
    - Increase labor market flexibility.
    - Ensure viable but temporarily-insolvent firms are restructured, while winding down unviable firms.

### Labor market developments and policy response (Box 1 highlights)
- Impact of the pandemic
  - Employment registered its largest fall on record—in the second quarter of 2020—the largest in the region.
  - Most of the employment decline was matched by a sharp drop in labor force participation rather than an increase in the number unemployed.
  - Decline in working hours was even more severe.
- Disproportionate effects
  - Young workers: one in every four young Turkish workers is now unemployed.
  - Female labor force participation: 32 percent (lowest in Europe); male rate: 69 percent.
  - Crisis severely affected low-skilled and informal workers.
- Poverty impact
  - The World Bank estimates that over 1½ million people were pushed below the poverty line in 2020.
- Policy response
  - Broad but small in scale: unemployment insurance, wage subsidies, lump sum transfers, work retention scheme, temporary ban on layoffs.
  - Turkey’s labor market support package was modest compared to many peers; initial fall in employment was the largest in the region.

_International Monetary Fund — Turkey: Selected Findings and Policy Recommendations (excerpts)._

### Box 1. Labor Market Developments and Policy Response (Concluded)

### 1turea2021001 - Box 1. Labor Market Developments and Policy Response (Concluded)

### Labor market policy responses to COVID-19 (Table 1 summary)
- Short-Term Work - Retention Schemes
  - Objective: Preserve existing worker-firm relations through temporary subsidized reduction in working hours.
  - Consideration: Temporary wage subsidy.
  - In Turkey: The Short-Term Work Allowance program (STWA) for highly impacted firms provides a wage subsidy to employees of partially or completely closed businesses.
- Unemployment insurance
  - Objective: Sustain consumption of laid-off workers.
  - Consideration: Increasing benefit amount is preferable to increasing benefit duration.
  - In Turkey: Automatic stabilizers in Turkey are well-targeted and have good coverage, but the benefit amount is low.
- Targeted + Temporary Wage Subsidies
  - Objective: Preserve jobs or workers’ incomes.
  - Consideration: More cost-effective than generalized payroll tax cut; must be temporary with clear sunset clauses to not hinder labor reallocation.
  - In Turkey:
    - The state covers the employees’ and employers’ social security contributions for three months after a business leaves the STWA.
    - The government provides wage and health insurance support for workers on (company-enforced) unpaid leave.
- Expanding Social Assistance Programs
  - Objective: Support informal workers.
  - Consideration: Examples include relaxing eligibility criteria, increasing benefit levels, or setting up new transfer schemes.
  - In Turkey: Social Support Program; the targeting and coverage of public transfers in Turkey are good, but benefits are low.
- Targeted + Temporary Hiring Subsidies
  - Objective: Speed up job recovery post lockdown.
  - Consideration: Careful policy design needed to avoid "gaming".
  - In Turkey: Unemployment insurance contribution support provided to employers for new hires.
- Active labor market policies
  - Objective: Support structural transformation post lockdown.
  - Consideration: Skill-enhancing programs (e.g., digitalization).
  - In Turkey: Some skills-training converted to online platforms, but few workers can work remotely.

Notes cited in the table:
- ILO: the fall in employment captures only one third of the total impact of the pandemic on hours worked, with the rest accounted for by reduced hours of those who continued working and workers sent on leave without pay.
- World Bank, 2021; World Bank, 2020; IMF October 2020 Fiscal Monitor and IMF Special Series on COVID-19 are referenced as bases for the table.

---

### Vulnerabilities in Non-Financial Corporates (NFCs)

### Pre-pandemic vulnerabilities
- Leverage
  - NFC debt as a share of total equity rose from 150 to 250 percent over the last decade.
  - The increase in leverage was particularly large in the transportation and the accommodation and food sectors.
- Foreign currency (FX) exposure
  - Around 20 percent of total debt is FX denominated (smaller than the 2017 peak of 25 percent but much higher than a decade ago).
  - The 30 percent depreciation of the real exchange rate since early 2017 has been a major headwind to firm deleveraging.
  - NFCs have built a positive short-term net FX position, partially mitigating FX liquidity risks.
  - Using a rudimentary "natural hedge" metric, only the transportation and mining sectors benefit from a higher share of exports to total sales than FX debt to total debt; manufacturing, trade, and construction appear poorly hedged.
- Profits and debt service
  - Operating profits grew steadily in recent years, but net profits remained subdued due to higher debt service costs.
  - Interest coverage ratios (ICR) declined across most sectors; construction and transportation saw ICRs approaching 1 in 2019.

### Impact of the pandemic
- Liquidity support and leverage
  - Liquidity measures included loan guarantees; payment deferrals by state-owned and other banks; and rapid lending by state-owned and other banks.
  - Some liquidity was used to reduce currency risk (increasing cash holdings and switching from FX to TL debt), but overall debt increased.
  - Staff estimates: equity buffers declined from 30 to around 20 percent of assets between 2019 and 2020 Q3.
- Profitability and distress indicators
  - Shrinking profits saw ICRs for listed NFCs fall to multi-year lows.
  - The share of firms with negative equity rose:
    - From 7 to 13 percent (using the comprehensive Orbis database).
    - Or to 15 to 22 percent (for listed firms).
  - For listed firms, over 20 percent of debt was issued by firms with an ICR below 1 in the last year.
  - After an initial spike, the implied probability of default for listed firms declined to pre-pandemic levels.
  - Spreads on commercial loans have been rising but remain well below 2018 peaks, indicating larger firms with greater capital access may fare better than smaller firms.

---

### Developments in Public Institutions’ Foreign Exchange Positions

- 2020 deterioration
  - State-owned banks, the Central Bank of the Republic of Turkey (CBRT), and the Ministry of Treasury and Finance saw a significant worsening of their net FX positions in 2020.
- State-owned banks and Treasury linkages
  - Over the summer of 2020, state-owned banks increased holdings of domestic Treasury FX securities by USD 11 billion—equivalent to 35 percent of these banks’ equity—while transferring the equivalent negative net FX position from these banks to the Treasury.
- CBRT FX position
  - The CBRT engaged heavily in FX swaps with local banks (borrowing FX reserves from these banks and lending TL liquidity in return).
  - After subtracting these swaps, the central bank’s net FX position deteriorated through 2020, reaching minus USD 39 billion in early 2021 (CBRT data).
- Systemic FX risks
  - A large adverse external or domestic shock could, in the event of external rollover problems or FX deposit withdrawals, lead to competition for scarce FX funding between banks and the CBRT.

---

### Central Bank Reserve Developments

- Quantity and composition
  - Gross reserves fell by more than USD 12 billion in 2020.
  - SDR-basket currencies now account for less than half of reserve assets, a marked fall from pre-pandemic levels.
  - Sixty percent of total CBRT reserve assets are now held either in gold or non-SDR-basket currencies, rather than in more traditional reserve assets.
- Reserve liabilities and exposure to banks’ FX liquid assets
  - More than half of reserve liabilities are now accounted for by banks’ liquid FX assets, compared to 20 percent only three years earlier.
  - This increases the risk of FX shortages in the economy in the event of a large adverse shock.
- Specific levels reported (CBRT breakdown snapshots)
  - SDR basket FX: 78 72 39 39 (Jan/Dec 2018–2021 snapshot).
  - Non-SDR basket FX: 0 5 15 17 (same snapshot).
  - Gold: 22 24 45 44 (same snapshot).
  - Banks' FX deposits: 94 72 50 48 (Jan/Dec 2018–2021 snapshot).
  - Of banks' FX deposits—required reserves: 77 38 30 30; free reserves: 17 34 20 18.
  - Banks' FX swaps: 11 4 3 30 (Jan/Dec/Dec/Mar 2018–2021 snapshot).
  - Official bilateral swaps: 0 7 11 10.
  - Treasury FX deposits: 4 7 9 11.
  - Memo: percent of banks' FX liquid assets in CBRT reserve liabilities: 19 48 51 48.

---

### Non-financial State-Owned Enterprises (SOEs)

- Coverage and fiscal costs
  - Analysis focuses on the 22 SOEs in the Treasury Portfolio as of end-2019.
  - Available information points to modest fiscal costs from SOEs, but data coverage is limited and not all SOEs are encompassed in fiscal accounts.
  - Some large public enterprises (e.g., Turkish Airlines, Turkish Post, TOKI) are excluded from New Economic Plan (NEP) fiscal aggregates; no single document consolidates financial information across all SOEs.
- Financial trends and indicators (selected 2016–2019 values)
  - Capital injections, payments for duties given, and transfers from budget to SOEs are shown as percent of GDP in Box Figure 1 (chart referenced).
  - Transfers from SOEs to budget (dividends, revenue share, taxes) shown as percent of GDP in Box Figure 1 (chart referenced).
  - Box Table 1 — Selected SOE Financial Ratios (2016, 2017, 2018, 2019):
    - Liquidity ratio: 2.1, 2.0, 1.6, 1.5
    - Interest coverage ratio: 19.0, 6.5, 2.8, 1.2
    - Return on Equity: 13.3, 4.2, 2.0, -1.1
    - Operating profit / sales: 15.7, 2.4, -4.9, -0.9
    - Net profits (% of GDP): 0.5, 0.2, 0.1, 0.0
  - Capital injections have grown but remain a small share of GDP.

---

### The Economy After the Pandemic — Structural Considerations

- Entrepreneurial dynamism
  - Turkey has a high share of entrepreneurs aiming to create large and expanding businesses, implying economic nimbleness and capacity for reallocation of capital and workers.
  - Box Figure 1: Transformational Entrepreneurship (percentage of 18-64 year-old population, 2016) places Turkey among economies with notable entrepreneurial aspiration.
  - Box Figure 2: Average Entry and Exit Rates (1998-2015 average) shows relatively rapid turnover of businesses supports reallocation.
- Export diversification and tourism
  - Tourism's role is shown in Box Figure 3 (percent of total exports) with historical series.
  - Recent export diversification away from a reliance on tourism, together with targeted policy support, would help mitigate pandemic impacts on tourism.
- Trade openness and exposure
  - Turkey remains a relatively closed economy, which may minimize direct effects from greater trade protectionism.
  - Transportation, administrative, and manufacturing sectors are most reliant on exports and would likely require business model adjustments if trade conditions change.
- Digital transformation
  - The pandemic could accelerate digital shifts, but in Turkey the impact appears transitory:
    - Online purchases using credit cards jumped during lockdowns but normalized as restrictions eased.
    - Relatively few jobs can be performed from home in Turkey, limiting long-term remote-work shifts.

*Source: IMF staff analysis as presented in the content unit "Box 1. Labor Market Developments and Policy Response (Concluded)" and subsequent boxes in the same chapter.*

### Box 6. The Economy After the Pandemic (Concluded)

### Box 6. The Economy After the Pandemic (Concluded)

### Telework, Online Purchases, and Consumer Preferences
- Preferences towards home working are unlikely to lead to deep structural changes immediately after the pandemic.
- Box Figure 5: Online Purchases (Percent of total credit card transactions) — chart covering Jan-18 to Jan-21 (no numeric series values supplied in text).
- Box Figure 6: Teleworkability, Europe (Index) — countries listed: BIH, ROU, TUR, MKD, SRB, BGR, HUN, HRV, MNE, POL, RUS; source Dingel and Neiman (2020).

### Household Balance Sheets and Real Estate
- Household balance sheets were robust before the pandemic, with low debt levels and a positive net FX position.
- After a steep fall in 2020Q2, employee pay is now only moderately below pre-pandemic levels (Real Total Compensation of Employees, TL millions, 2017 prices: chart 2017Q1–2020Q4).
- Household net worth rose in recent quarters, despite increasing debt:
  - Household Financial Net Worth (Percent of GDP): time series 2017Q1–2020Q3 shown (no single numeric summary in text).
  - Financial Assets composition shown: Transferable deposits, Other deposits, Currency, Shares and other equity, Other (Percent of GDP) for 2017Q1–2020Q3.
- Real House Prices (Index, 2017=100): series Jan-10 to Jan-21 shown.

### Financial Markets and External Risk Appetite
- The lira has underperformed in recent years versus other G-20 EMs (Exchange Rate vis-à-vis US Dollar, Index, 2010=100; Apr-16 to Apr-21).
- Turkish equities underperformed (Local Stock Market Index, Index, 2010=100, US$; Apr-16 to Apr-21).
- Turkey’s risk premium remains high (EMBIG Spreads on US$ Sovereign Bonds, Basis points; Apr-16 to Apr-21).
- Portfolio flows have remained volatile (External Flows into Bond and Equity ETFs and Mutual Funds, Billions of US$; Mar-16 to Mar-21).

### Real Sector Developments
- GDP rebounded sharply, driven by domestic demand.
- Both services and manufacturing activity recovered.
- Inflation picked up, driven by expansionary policies:
  - Contributions to CPI Inflation (Percentage points): Alcoholic beverages, tobacco, and gold; Unprocessed food and energy; Core inflation; Headline (y/y) — chart Mar-16 to Mar-21.
  - Inflation (period-average) and Inflation (end-year) time series provided in Table 1.
- Inflation expectations rose:
  - Inflation Expectations (Percent): series and 10-year breakeven inflation shown; inflation target indicated.

### Coincident and Leading Indicators
- Industrial activity and retail sales rebounded sharply (Industrial Production and Capacity Utilization; Retail Sales Volume, Index, 2015=100, SWDA).
- Leading and sentiment indicators improved: PMI and Economic sentiment series, sectoral confidence indicators, capacity utilization.

### Labor Market Developments
- The unemployment rate fell from its 2020 peak, but hidden slack remains:
  - Lower employment and lower overall labor force participation.
  - Low female labor force participation and high female unemployment persist.
  - Youth unemployment remains a key challenge.
- Specific series shown:
  - Youth Unemployment Rate (Percent, SA): Feb-15 to Feb-21.
  - Unemployment Rate by gender (Percent, SA): Feb-15 to Feb-21.
  - Total Employment and Labor Force (SA, millions): Feb-19 to Feb-21.
  - Labor Force Participation Rate by sex (Percent, SA).

### Financial Sector
- Lending grew rapidly, driven by state-owned banks.
- State-owned banks raised sizeable funding in foreign currency.
- Net interest margins benefitted from expansionary monetary policy and regulatory flexibility.
- Bank net FX positions are broadly balanced: negative on-balance sheet position offset by positive off-balance sheet position (Net FX Position, Billions of US$).
- Banks report high capitalization and moderate nonperforming loan ratios, reflecting regulatory flexibility and strong loan growth, especially among state-owned banks:
  - Capital Adequacy Ratios (CAR, T1R) shown for Feb-17 to Feb-21.
  - Non-Performing Loans (Percent of total loans) by bank type shown for Feb-17 to Feb-21.

### Fiscal Stance and Fiscal Financing
- The central government deficit widened marginally in 2020, reflecting strong revenues and a modest rise in spending.
- Rest of public sector deficit was stable; public debt increased but remained relatively low.
- Revenue strength driven by indirect taxes and CIT; spending contained despite higher current transfers.
- Fiscal figures (selected):
  - Central Government: Fiscal Balance (Percent of GDP, authorities' def.) — Interest payments, Primary balance, Overall balance chart, 2016–2020.
  - Central Government Primary Revenue and Expenditure (Percent of GDP, program definition): primary revenue and primary expenditure series 2016–2020.
  - General Government Gross Debt, EU Definition (Percent of GDP): series 2016–2020.
- Fiscal financing:
  - Increased reliance on domestic borrowing and alternative borrowing instruments.
  - FX-denominated domestic borrowing and FX-denominated debt increased.
  - Average maturity of domestic borrowing (Fixed coupon bonds): monthly avg. mat. (month) and cumulative mat. (month) series from 2005–2021 show maturities fell sharply until recently.

### External Sector and Reserves
- The current account deteriorated sharply due to lower exports and resilient imports; increasing gold imports exacerbated the deterioration.
- A large reserve drawdown helped fund the deficit; reserve quantity and quality deteriorated.
- Key balance of payments indicators:
  - Current Account Balance (Percent of GDP): long-run series 2000–2020.
  - Exports and Imports (US$ billion): 2016–2020 (Exports US$214.2 in 2021; Imports US$235.1 in 2021 shown in Table 2).
  - Current Account (Billions of US$, 12-month-moving-sum): shown including series excluding fuel and excluding fuel & gold.
  - Current Account and Financing (Billions of US$, 12-month-moving-sum): financing components including Reserves (+ = drawdown).
  - Reserves (Percent of ARA Metric): 2019 and 2020 comparisons across countries; Turkey listed among others.
  - Reserve composition (US$ billion): SDR currencies, Other currencies, Gold for 2019–2020.

### Selected Economic Indicators and Projections (Table 1, selected lines)
- Population (2020): 83.6 million
- Per capita GDP (2020): US$8,562
- Life expectancy (2018): 77.4 years
- Gini index (2018): 41.9
- Quota: SDR 4,658.6 million
- Real GDP growth rate:
  - 2018: 3.0
  - 2019: 0.9
  - 2020: 1.8
  - 2021 (Prelim.): 5.8
  - 2022 (Proj.): 3.3
  - 2023 (Proj.): 3.3
  - 2024 (Proj.): 3.3
  - 2025 (Proj.): 3.3
  - 2026 (Proj.): 3.3
- Inflation (period-average):
  - 2018: 16.3
  - 2019: 15.2
  - 2020: 12.3
  - 2021 (Prelim.): 16.9
  - 2022 (Proj.): 14.9
  - 2023 (Proj.): 12.8
  - 2024 (Proj.): 12.5
  - 2025 (Proj.): 12.5
  - 2026 (Proj.): 12.5
- Unemployment rate:
  - 2018: 11.0
  - 2019: 13.7
  - 2020: 13.2
  - 2021 (Prelim.): 12.5
  - 2022–2026 (Proj.): 11.0, 10.5, 10.5, 10.5, 10.5
- General government gross debt (EU definition):
  - 2018: 30.2
  - 2019: 32.6
  - 2020: 39.5
  - 2021 (Prelim.): 40.2
  - 2022 (Proj.): 41.5
  - 2023 (Proj.): 43.4
  - 2024 (Proj.): 44.6
  - 2025 (Proj.): 45.6
  - 2026 (Proj.): 46.5
- Current account balance (Percent of GDP):
  - 2018: -2.8
  - 2019: 0.9
  - 2020: -5.1
  - 2021 (Prelim.): -2.7
  - 2022 (Proj.): -1.7
  - 2023 (Proj.): -1.8
  - 2024 (Proj.): -1.9
  - 2025 (Proj.): -1.9
  - 2026 (Proj.): -2.0
- Gross international reserves (billions of US dollars):
  - 2018: 93.0
  - 2019: 105.7
  - 2020: 93.3
  - 2021 (Prelim.): 78.3
  - 2022 (Proj.): 77.6
  - 2023 (Proj.): 76.5
  - 2024 (Proj.): 75.2
  - 2025 (Proj.): 73.2
  - 2026 (Proj.): 70.3

### Balance of Payments and External Financing (Tables 2–3, selected figures)
- Table 2 — Current account balance (Billions of US dollars):
  - 2018: -21.7
  - 2019: 6.8
  - 2020: -36.8
  - 2021 (Prelim.): -20.9
  - 2022 (Proj.): -14.1
  - 2023 (Proj.): -16.0
  - 2024 (Proj.): -18.2
  - 2025 (Proj.): -21.3
  - 2026 (Proj.): -24.8
- Exports of goods (Billions of US$):
  - 2018: 178.9
  - 2019: 182.2
  - 2020: 168.4
  - 2021 (Prelim.): 205.1
  - 2022 (Proj.): 214.2
  - 2023 (Proj.): 225.1
  - 2024 (Proj.): 236.8
  - 2025 (Proj.): 251.9
  - 2026 (Proj.): 266.0
- Imports of goods (Billions of US$):
  - 2018: 219.6
  - 2019: 199.0
  - 2020: 206.3
  - 2021 (Prelim.): 227.0
  - 2022 (Proj.): 235.1
  - 2023 (Proj.): 252.4
  - 2024 (Proj.): 272.5
  - 2025 (Proj.): 294.0
  - 2026 (Proj.): 318.5
- Table 3 — Gross external financing requirements (Billions of US$):
  - 2018: 201.9
  - 2019: 169.9
  - 2020: 210.6
  - 2021 (Prelim.): 213.7
  - 2022 (Proj.): 210.2
  - 2023 (Proj.): 215.8
  - 2024 (Proj.): 226.4
  - 2025 (Proj.): 237.3
  - 2026 (Proj.): 243.1
- Available financing components include Foreign direct investment (net), Portfolio flows, Government eurobonds (drawings), Medium- and long-term debt financing, and Short-term debt financing (detailed annual figures provided in Table 3).

### Public Sector Finances (Table 4, selected lines)
- Nonfinancial public sector primary balance (Percent of GDP):
  - 2018: -2.3
  - 2019: -3.8
  - 2020: -3.4
  - 2021 (Prelim.): -3.4
  - 2022–2026 (Proj.): -3.2, -3.2, -3.0, -2.9, -2.9
- Central government primary revenue (Percent of GDP):
  - 2018: 18.7
  - 2019: 17.8
  - 2020: 18.8
  - 2021 (Prelim.): 18.5
  - 2022–2026 (Proj.): 18.5 (each year)
- Primary expenditure (Percent of GDP): 20.2 (2018), 20.8 (2019), 21.3 (2020), 21.2 (2021 Prelim.), 21.1–21.0 (2022–2026 Proj.).
- Nonfinancial public sector overall balance (Percent of GDP):
  - 2018: -3.9
  - 2019: -5.8
  - 2020: -5.4
  - 2021 (Prelim.): -6.1
  - 2022–2026 (Proj.): -6.3, -6.5, -6.5, -6.6, -6.7

### Financial Soundness Indicators (Table 5, selected lines)
- Capital Adequacy (CAR):
  - 2012: 18
  - 2013: 15
  - 2014: 16
  - 2015: 16
  - 2016: 16
  - 2017: 17
  - 2018: 18
  - 2019: 19
  - 2020: (chart suggests 19)
- NPLs / Gross Loans (percent): time series indicating elevated levels across years; Provisions / Gross NPLs also provided.
- Loan-to-Deposit ratio indicators and other liquidity metrics provided for 2012–2020.

### Risks, Likelihood, Economic Impact, and Policy Responses
- Unexpected shifts in the COVID-19 pandemic (asynchronous progress, limited access to vaccines, prolonged pandemic):
  - Likelihood: Medium
  - Economic Impact: High. Effects include reassessment of growth prospects triggering capital outflows, depreciation, inflationary pressures, and debt defaults; prolonged support could exacerbate stretched asset valuations and financial vulnerabilities.
  - Policy Response:
    - Extend containment measures as needed and expedite vaccination.
    - Provide additional temporary and targeted fiscal support to the most vulnerable.
    - Maintain a firm monetary stance.
    - Use exchange rate as a shock absorber, strictly limiting FX intervention given low reserves.
- Sharp rise in global risk premia (widespread risk-off event):
  - Likelihood: Medium
  - Economic Impact: High. Risk asset price falls, volatility spikes, losses in major non-bank financial institutions, higher risk premia, financing difficulties, and potential bank capital erosion.
  - Policy Response:
    - Tighten monetary policy.
    - Use exchange rate as a shock absorber, strictly limiting FX intervention given low reserves.
    - Allow automatic fiscal stabilizers to operate and provide targeted, temporary fiscal support to the most vulnerable.
    - Adopt a medium-term fiscal plan that creates fiscal space.
    - Promote out-of-court debt workouts.
- Widespread social discontent and political instability:
  - Likelihood: High
  - Economic Impact: High. Growing political polarization and instability weaken policymaking and confidence.
  - Policy Response:
    - Expedite vaccination program.
    - Provide additional temporary and targeted fiscal support to the most vulnerable.

*Source: Box 6. The Economy After the Pandemic (Concluded), IMF staff compilation and tables.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Purpose and Interpretation
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- Relative likelihood is staff’s subjective assessment of the risks surrounding the baseline:
  - “low” is meant to indicate a probability below 10 percent,
  - “medium” a probability between 10 and 30 percent,
  - “high” a probability between 30 and 50 percent.
- The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.
- Non-mutually exclusive risks may interact and materialize jointly.
- The conjunctural shocks and scenario highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline.
- Structural risks are those that are likely to remain salient over a longer horizon.

### Conjunctural (Shorter-horizon) Risks and Policy Responses
- Widespread social discontent and political instability
  - Likelihood: High
  - Overall concern: High.
  - Risk description: Social tensions erupt as the pandemic and/or inadequate policy response to it cause socio-economic hardship, or due to unequal access to vaccines. Growing political polarization and instability weaken policymaking and confidence.
  - Policy recommendations:
    - Expedite vaccination program.
    - Additional temporary and targeted fiscal support to the most vulnerable.
- Intensified geopolitical tensions and security risks
  - Likelihood: High
  - Overall concern: High.
  - Risk description: Disorderly migration, higher commodity prices, and/or lower confidence could accelerate capital outflows and pressure the currency. Refugee migration to Turkey could increase and exacerbate social pressures.
  - Policy recommendations:
    - Tighten monetary policy.
    - Allow automatic fiscal stabilizers to operate and provide targeted, temporary support to the most vulnerable.
    - Use exchange rate as a shock absorber, strictly limiting FX intervention given low reserves.
    - Domestic action, with international support, for refugees.

### Structural (Global) Risks and Policy Responses
- Accelerating de-globalization (Geopolitical competition leads to further fragmentation)
  - Likelihood: Medium
  - Overall concern: Medium.
  - Risk description: Reshoring and reduced trade lower potential growth. Turkey’s market access could be adversely affected, worsening balance of payments pressures.
  - Policy recommendations:
    - Use exchange rate as shock absorber.
    - Tighten monetary policy.
    - Accelerate reforms to improve export competitiveness, diversify markets and support multilateral rules-based trade system.
- Higher frequency and severity of natural disasters related to climate change
  - Likelihood: Medium
  - Overall concern: Medium.
  - Risk description: Severe economic damage to smaller economies susceptible to disruptions. Domestic vulnerabilities arise from the impact on agriculture and inflation, notably on the most vulnerable households.
  - Policy recommendations:
    - Accelerate reforms to enhance climate resilience (drought resistant crops, improved infrastructure).
    - Deploy temporary and targeted policies to mitigate impact on households.

### Domestic Risks: Disorderly Macro-Financial Cycle and Policy Responses
- Disorderly macro-financial cycle of deleveraging and income compression
  - Likelihood: High
  - Overall concern: High.
  - Risk description: External financing pressures and/or domestic policy mistakes (including premature monetary policy easing or inadequate policy response to market pressures) could give rise to rapid exchange rate depreciation, which weakens corporate balance sheets and worsens bank asset quality, triggering sharp deleveraging and a slowdown of economic activity. Continued erosion of policy buffers and monetary policy credibility could lead to weaker confidence, capital outflows, accelerated dollarization, reserve depletion, and pressure on currency. NBFCs lose access to external finance.
  - Policy recommendations:
    - Tighten monetary policy.
    - Use exchange rate as a shock absorber, strictly limiting FX intervention given low reserves.
    - Allow automatic fiscal stabilizers to operate and provide targeted, temporary support to the most vulnerable.
    - Undertake third-party asset quality review, followed by rigorous stress tests and follow-up measures as needed.
    - Promote out of court debt workouts.
    - Adopt a medium-term fiscal plan that creates fiscal space.

*IMF staff assessment as presented in Annex I. Risk Assessment Matrix*

### 6.      The public DSA suggests that Turkey’s government debt will remain below

### 6. The public DSA suggests that Turkey’s government debt will remain below vulnerability benchmarks under the baseline and under various individual shock scenarios

### Baseline assessment and medium-term outlook
- Under the baseline, public debt remains below vulnerability benchmarks and does not breach the 70 percent of GDP benchmark by 2026.
- Debt would not stabilize by 2026, absent policy adjustment.
- Baseline projections (selected):
  - Nominal gross public debt: 2019: 31.3; 2020: 32.6; 2021: 39.5; 2022: 40.2; 2023: 41.5; 2024: 43.4; 2025: 44.6; 2026: 45.6 (in percent of GDP).
  - Public gross financing needs: 2019: 7.9; 2020: 8.4; 2021: 10.5; 2022: 12.1; 2023: 12.9; 2024: 13.3; 2025: 13.5; 2026: 13.8 (in percent of GDP).
  - Real GDP growth (in percent): 2019: 6.4; 2020: 0.9; 2021: 1.8; 2022–2026: 3.3 each year.
  - Inflation (GDP deflator, in percent): 2019: 8.9; 2020: 13.9; 2021: 14.3; 2022: 19.3; 2023: 11.1; 2024: 10.7; 2025: 11.2; 2026: 12.0.
  - Effective interest rate (in percent): 2019: 9.4; 2020: 9.5; 2021: 10.1; 2022: 10.3; 2023: 10.7; 2024: 10.9; 2025: 11.0; 2026: 11.0.
  - Change in gross public sector debt (percent of GDP): 2019: -1.5; 2020: 2.5; 2021: 7.1; 2022: 0.5; 2023: 1.3; 2024: 1.9; 2025: 1.3; 2026: 0.9; cumulative: 1.0? (table shows cumulative 6.8 over projection horizon).

### Stress test scenarios and impacts on public debt
- General finding: Among individual shocks, GDP growth, interest rates, and contingent liability shocks lead to significant increases in public debt; the primary balance shock does not substantially affect debt dynamics.
- Primary balance shock:
  - Assumption: deterioration of the primary balance by 1 standard deviation for 2 years starting in 2022.
  - Outcome: public debt increases moderately to 48 percent of GDP in 2026.
  - Sovereign borrowing costs: raised by 25 basis points for each 1 percentage point of GDP worsening in the primary balance.
  - Impact on gross financing needs: modest.
- Growth shock:
  - Assumption: real output growth rates lowered by 1 standard deviation (3.2 percentage points) for 2 years starting in 2022.
  - Outcome: primary balance deteriorates to -5.7 percent of GDP by 2023; debt-to-GDP reaches about 53 percent by 2026; gross financing needs climb to 16 percent of GDP.
  - Sovereign borrowing costs: higher as a result.
- Interest rate shock:
  - Assumption: real effective rate reaches similar levels to those prevailing in 2013, implying a permanent increase in spreads by about 635 basis points.
  - Outcome: government’s interest bill reaches an implicit average interest rate of about 14 percent over the medium term; by 2026 debt-to-GDP about 50 percent and gross public financing needs about 16.5 percent.
- Contingent liability shock:
  - Assumption: increases non-interest expenditures by 10 percent of GDP in 2022; combined with a real GDP growth shock (1 standard deviation for 2 years); sovereign borrowing costs pushed up (25 bps for each 1 percent of GDP worsening in the primary balance); inflation declines (0.25 percentage points for each percentage point decrease in GDP growth).
  - Outcome: debt-to-GDP rises sharply in 2022 and reaches 66 percent of GDP in 2026; gross financing needs reach about 20 percent of GDP in the medium term.
- Combined macro-fiscal shock (largest effects of individual macro-fiscal shocks, excluding contingent liability shock):
  - Outcome: public debt and gross financing needs reach about 70 percent and 21 percent of GDP over the medium term.
- Combined macro-fiscal-contingent liability shock (extreme combined shock including contingent liability):
  - Outcome: public debt breaches the 70 percent benchmark in 2022 and reaches 82 percent of GDP by 2026; gross financing needs increase to around 25 percent of GDP over the medium term.

### Composition, maturity, and financing needs (selected projections and indicators)
- Composition and maturity:
  - Gross nominal public debt and public gross financing needs projected through 2026 (figures shown in the source charts).
  - By maturity: projections split between medium and long-term and short-term debt (charts).
  - By currency: projections split between local currency-denominated and foreign currency-denominated debt (charts).
- Market and rating indicators (as of projections):
  - EMBIG (bp): 542 (noted in table header).
  - 5Y CDS (bp): 476 (noted in table header).
  - Ratings: Moody’s: B2/B2; S&P: B+/BB-; Fitch: BB-/BB- (as shown in table header).

### External debt sustainability (Annex IV) — vulnerabilities and outlook
- Overall assessment:
  - Turkey’s external debt is sustainable under the baseline but high and vulnerable to valuation shocks.
  - External debt increased to 63 percent of GDP in 2020.
  - Under the baseline, external debt declines to around 40 percent of GDP by 2026, as growth returns to trend and the real exchange rate appreciates.
  - The external debt path remains sensitive to large lira depreciation.
  - High external financing needs and low reserves expose the economy to liquidity risks.
- Background and structure:
  - Much of external debt is held by the financial sector and the non-financial private sector (around 45 percent of GDP), roughly equally split between banks and non-banks.
  - The share of short-term debt is projected to increase from around 30 to 35 percent of overall debt over the next five years.
  - Average time to maturity of the government’s external debt stock remains high, at ten years.
- Stress-test results and vulnerabilities:
  - Under a permanent 30 percent lira depreciation over the baseline, external debt would temporarily exceed 90 percent of GDP by end-2021, but decline to around 64 percent by 2026.
  - Turkey’s gross external financing needs: USD 211 billion in 2020; 29.4 percent of GDP; 226 percent of GIR.
  - Gross external financing needs are expected to average around 24 percent of GDP over 2021–2026.
  - Liquidity and rollover risks arise from: just over one third of private external debt being short term; large bank deposits by non-residents; trade credits; and significant Eurobond maturities over the same period.

### Key numerical highlights (preserved exactly as presented)
- Debt and financing metrics (selected exact figures from tables and text):
  - Public debt under extreme combined shock: 82 percent of GDP by 2026.
  - Combined macro-fiscal shock: public debt about 70 percent of GDP; gross financing needs about 21 percent of GDP.
  - Contingent liability shock: non-interest expenditures increase by 10 percent of GDP in 2022; debt-to-GDP reaches 66 percent in 2026; gross financing needs about 20 percent of GDP.
  - Growth shock parameters: 1 standard deviation = 3.2 percentage points; primary balance falls to -5.7 percent of GDP by 2023.
  - Interest rate shock: permanent increase in spreads by about 635 basis points; implicit average interest rate about 14 percent over the medium term.
  - Sovereign borrowing costs response: 25 basis points for each 1 percentage point of GDP worsening in the primary balance.
  - External debt: increased to 63 percent of GDP in 2020; under baseline declines to around 40 percent of GDP by 2026.
  - Gross external financing needs (USD): 211 billion in 2020; in percent of GDP: 29.4 percent in 2020; projected average about 24 percent of GDP over 2021–2026.
  - Short-term external debt share: from around 30 to 35 percent of overall debt (projected).
  - Historical current account deficit (excluding interest payments) average: 4.3 percent of GDP over 2009-2018.

*Source: IMF staff (Turkey Public Sector Debt Sustainability Analysis and Annex IV: External Debt Sustainability), as presented in the provided content.*

### Annex V. Implementation of Past Fund Advice

### Annex V. Implementation of Past Fund Advice

### Recent Fund Advice and Overall Assessment
- The 2019 Article IV staff report concluded the economy remained susceptible to external and domestic risks and that prospects for strong and durable growth over the medium term looked challenging without reforms to address vulnerabilities, strengthen policy credibility, and boost productivity.
- Fund advice: move the focus from short-run growth to higher and more resilient medium-term growth through a comprehensive reform package.
- Assessment: the policy shift was a step in the right direction but "needs to be redoubled to contain risks, and rebuild buffers, and secure stronger and durable growth."

### Financial Sector Supervision and Bank Recovery (FSAP follow-up)
- Implementation in line with 2017 FSAP recommendations continued with enhancements to supervision and improvements in bank recovery planning.
- BRSA enhancements:
  - Banking sector risk assessment broadened and strengthened to include examination of profitability, concentration risks in the loan book, and risks from derivatives and early loan redemptions.
- Insurance and pension supervision:
  - The Insurance and Private Pension Regulation and Supervision Agency now collects data and prepares risk maps composed of quantitative and qualitative risk assessments for insurance, reinsurance and pension companies.
  - Capital adequacy, financial status, and risk management and organizational structures are examined for deficiencies.
- Bank recovery planning:
  - Systemically-important banks will submit draft recovery plans to the BRSA this year, which should be in line with the EU’s bank recovery and resolution directive.

### Delays and Outstanding FSAP Recommendations (Pandemic Impact)
- Several 2017 FSAP recommendations delayed because of the immediate COVID-19 response:
  - Proposals to further strengthen the BRSA’s independence by revising the Banking Law have been postponed, including board appointment procedures and the ability of the relevant minister to take action against the BRSA.
  - Financial Stability and Development Committee (FSDC) is still working on rules and procedures to improve systemic risk assessment and coordination of macroprudential policies, make the committee more accountable for its decisions, and mandate monthly meetings of the FSDC.
  - The CBRT provided emergency funding during COVID-19 stress which helped avert a liquidity crisis, but the CBRT is still conducting studies of appropriate tools for emergency liquidity assistance that should be established through amendments to central bank regulations.
- Authorities requested to bring forward the next FSAP to 2021, providing an opportunity to update staff’s assessment of these issues.

### Selected Fund Relations and Statistical/Institutional Context (key figures and dates)
- Membership: Turkey became a member of the Fund on March 11, 1947.
- Quota: 4,658.60 SDR Million (100.00 percent).
  - Fund holdings of currency: 4,545.83 SDR Million (97.58 percent).
  - Reserve position in Fund: 112.78 SDR Million (2.42 percent).
- SDR Department:
  - Net cumulative allocation: 1,071.33 SDR Million (100.00 percent).
  - Holdings: 977.05 SDR Million (91.20 percent).
- Outstanding purchases and loans: None.
- Latest Article IV Board discussion: December 9, 2019. Article IV staff report published December 26, 2019 (IMF Country Report No. 19/395).
- Last FSAP/FSSA: Financial System Stability Assessment issued February 3, 2017 (IMF Country Report No. 17/35).
- Resident Representative: Mr. Ben Kelmanson, senior resident representative since August 2018.
- Safeguard assessment of central bank: completed June 29, 2005; uncovered no material weaknesses; some recommendations implemented.
- Exchange rate arrangement: Turkish lira; de jure arrangement free floating; de facto floating. Turkey accepted obligations of Article VIII, Sections 2, 3, and 4 as of March 22, 1990.

### Data, Statistics, and Surveillance Adequacy
- General: data provision broadly adequate for surveillance; shortcomings in national accounts and government finance statistics noted.
- National accounts:
  - Published data for 1998 onwards adheres to 2008 SNA/ESA 2010.
  - TURKSTAT published a new series in December 2016 with reference year 2009 and benchmark year 2012.
  - Quarterly national accounts published within 2 months after the reference period; annual GDP estimated independently from quarterly estimates and published within 9 months after the reference period.
- Price statistics:
  - CPI base year 2003; weights based on Household Budget Survey conducted yearly by TURKSTAT.
- Government finance statistics:
  - Coverage largely complete but complicated by quasi-fiscal operations of state banks, SEEs, and other public entities and by consolidating cash-based accounts with accrual-based SEEs.
  - Quarterly general government accrual data reported for publication in International Financial Statistics (IFS).
- Monetary and financial statistics:
  - CBRT reports monetary statistics using standardized report forms (SRFs) in line with the IMF’s Monetary and Financial Statistics Manual.
  - BRSA reports all 12 core FSIs and nearly all encouraged FSIs quarterly.
- External sector statistics:
  - CBRT compiles and disseminates balance of payments and IIP statistics monthly in broad conformity with BPM6.
  - CBRT participates in IMF coordinated surveys on direct and portfolio investments and reports international reserves and foreign currency liquidity templates regularly.
- Data Standards:
  - Turkey subscribed to the Special Data Dissemination Standard (SDDS) since 1996.
  - Latest Data ROSC published September 2009.

### Additional Operational and Institutional Notes (selected program and cooperation figures)
- Latest Financial Arrangements (selected historic approvals, in millions of SDRs):
  - Stand-By 05/11/05–05/10/08: 6,662.04 approved and drawn.
  - Stand-By 02/04/02–02/03/05: 12,821.20 approved; 11,914.00 drawn.
  - Stand-By 12/22/99–02/04/02: 15,038.40 approved; 11,738.96 drawn.
  - SRF 12/21/00–12/20/01: 5,784.00 approved and drawn.
- Projected Payments to the Fund (charges/interest):
  - 2021: 0.05 (In millions of SDRs).
  - 2022: 0.06; 2023: 0.06; 2024: 0.06; 2025: 0.06.
- World Bank/IBRD cooperation highlights:
  - CPF extended to include FY22–23; IBRD portfolio total US$7.54 billion across 21 IBRD operations, one GEF-financed project, and seven RETFs.
  - To date US$6.6 billion of the CPF financing envelope (US$7–10.5 billion for FY17–23) has been used.
  - WBG added five COVID-response projects in 2020; four effective as of mid-February 2021.
  - EU FRiT entrusted to WBG: €205 million and €395 million for phases 1 and 2; FRIT-2 earmarked about US$283 million to WBG plus US$150 million for municipal services; FRIT-2 projects expected fully effective by end-March 2021.
- IFC exposure:
  - IFC committed US$938 million to Turkish banks under GTFP.
  - IFC exposure to Turkey over US$4 billion at end-FY20 (June 2020), its 2nd largest country exposure globally.
- MIGA exposure:
  - As of end-FY19, MIGA gross exposure in Turkey totaled about US$2.7 billion across 15 projects, representing about 12 percent of MIGA’s gross portfolio.

*Source: Annex V. Implementation of Past Fund Advice (1turea2021001) — IMF staff report content provided.*

### 6.3 percent in third quarter and 5.9 percent in the last quarter. The 1.8 percent growth rate in

### 1turea2021001 - 6.3 percent in third quarter and 5.9 percent in the last quarter. The 1.8 percent growth rate in

### Economic performance and labor market
- GDP growth in 2020: 1.8 percent, making Turkey one of the few countries with positive growth rates.
- Quarterly growth cited: 6.3 percent in third quarter and 5.9 percent in the last quarter.
- Unemployment: declined to 13.2 percent in 2020, compared to 13.7 percent in 2019.

### Pandemic policy response and Economic Stability Shield
- Authorities implemented partial lockdowns, night and weekend curfews, domestic travel restrictions, and remote work.
- Economic Stability Shield package components:
  - Tax, loan, and premium payments deferrals.
  - Tax rate cuts.
  - Shoring up credit and social spending, including a social support program.
  - Short-time working allowance; cash aid; unemployment benefits.
- Total size of the package: more than 13 percent of Turkey's GDP (including additional expenditures, loss of budget revenues, and loans and guarantees).
- Direct support: cash-grant package for tradesmen and craftsmen announced in the second half of May.

### Vaccination program
- Mass vaccination financed by the budget and free to the public.
- Doses delivered: almost 28 million doses; 16 million of which are the first dose.
- Authorities procured an additional sizable amount of 60 million doses.
- Target: vaccinating the adult population by the end of August.
- First locally produced COVID-19 vaccine expected to be rolled out by the end of the summer.

### Outlook and policy coordination
- Authorities project GDP growth: 5.8 percent in 2021, and 5 percent in 2022 and 2023.
- Recovery drivers and risks:
  - Leading indicators supportive of recovery.
  - Tight monetary stance and strong policy coordination expected to moderate money supply, credit expansion, and domestic demand.
  - Travel restrictions pose risks to tourism, but a sharp increase in tourism revenues is expected once mass vaccination takes place.
  - Strong demand in major trade partners and changes in global supply chains will buffer export performance.
  - Expected reductions in risks from current account balance and external financing; FX-driven cumulative cost effects to alleviate; improvement in inflation outlook.
- Institutional reforms announced: establishment of Economy Coordination Board, Financial Stability Committee, and Price Stability Committee; Price Stability Committee to assess structural shocks posing risks to inflation.

### Monetary policy
- Early pandemic response: accommodative monetary policy to ensure liquidity for the financial sector.
- CBRT measures: boost liquidity of domestic government bond market; FX liquidity management via FX swap auctions in euros and gold in addition to US dollars; increase limits of primary dealer banks; decrease reserve requirement ratios; targeted additional liquidity facilities; Turkish lira-denominated rediscount credits for export and FX-earning services.
- Policy rate path:
  - 8.25 percent in August 2020.
  - Policy rate increased at September, November, and December meetings.
  - In March 2021, policy rate brought to 19 percent via front-loaded and strong additional monetary tightening.
- Operational framework: simplified starting from November by re-introducing the one-week repo rate as the main policy instrument.
- CBRT objectives and modalities:
  - Core mandate: decrease inflation to medium-term target of 5 percent by 2023.
  - Full-fledged inflation targeting framework; use all available tools independently.
  - Continued floating exchange rate regime; no nominal or real exchange rate target.
  - CBRT will not conduct FX buying or selling transactions to determine the level or direction of exchange rates.
  - FX rediscount credit repayments to continue contributing to FX reserves in 2021; contribution from FX rediscount credit facility to reserves projected to amount to US$ 21 billion in 2021.
  - Commitment to strengthen policy communication and data dissemination in 2021.

### Fiscal policy
- Prudent fiscal stance emphasized; targeted deficit referenced:
  - Targeted deficit (4.9 percent) was higher than expected at beginning of 2020, but realized as 3.4 percent, including pandemic response.
- Fiscal support instruments mobilized: tax and social security premium deferrals, efficiency gains in expenditures, overperformance in other tax items.
- Social support focus:
  - Support for vulnerable segments, retirees without other income, employees on unpaid leave or reduced hours.
  - Informal sector workers supported through social assistance programs and new employment incentive scheme.
  - Short-term work and unpaid leave allowance program durations extended.
- Fiscal stance going forward: remain prudent while providing increased, targeted, selective, streamlined fiscal programs for vulnerable groups; fiscal consolidation a priority once pandemic abates to set public debt on a downward trajectory.
- General government debt: 39.5 percent of GDP at end-2020.
  - Authorities estimate general government debt stock will be 40.8 percent in 2021, 41.6 percent in 2022, and 41.8 percent in 2023 according to the Medium-Term Program.
- Debt composition concerns: average borrowing maturities declined and FX share of the stock increased due to domestically issued FX-denominated government bonds used to sterilize excess FX deposits resulting from dollarization.
- Authorities commit to strategic benchmarking borrowing policy to mitigate market risks and gradually decelerate domestic FX issuances as market conditions allow.
- Fiscal risk management: continued scrutiny of contingencies from PPPs and SOEs; all revenue guarantee payments for PPPs budgeted in a three-year rolling horizon; Economic Reform Package includes finalization of draft PPP law to strengthen regulatory framework and integrate contingent liabilities.

### Financial sector policies
- Banking sector resilience:
  - Tier 1 capital ratio: 14 percent as of March 2021.
  - Standard CAR: 18 percent as of March 2021.
  - Non-performing loans ratio: 3.8 percent as of March 2021.
- Credit dynamics: large credit expansion during pandemic, followed by tightening after monetary policy shift; loan-to-deposit ratio declined accordingly.
- Supervisory actions: detailed Asset Quality Review being conducted without need for third-party review; forthcoming Financial Sector Assessment Program (FSAP) review in 2021 to assess supervisory framework quality.
- AML/CFT: strengthened framework including the Law on Preventing the Financing of the Spread of Weapons of Mass Destruction introduced in December 2020.

### Structural reforms and competitiveness
- Reform priorities:
  - Strengthening institutional governance.
  - Encouraging private sector investment.
  - Facilitating domestic trade.
  - Increasing competitiveness.
  - Strengthening market surveillance and supervision.
- Implementation details:
  - Project- and product-based incentives to increase local production and reduce import dependency.
  - Targeted incentives for renewable energy and energy technologies to address climate change challenges.
  - Human rights action plan with nine specific objectives to be implemented within a two-year period, aiming at judicial transparency and independence and measures to ease resolving disputes between businesses and administrations, including establishing specialized courts (finance, trade unions, zones).
  - Authorities published a detailed implementation roadmap identifying responsible institutions and deadlines; plan to announce quarterly progress reports to enhance transparency.
- Expected outcomes: increase international competitiveness, build back better for a more resilient economy, and accelerate recovery with mass vaccination leveraging Turkey’s young, agile, and educated workforce.

### Refugees
- Turkey hosts over 4 million refugees.
- During the pandemic, authorities provided continuous and free access to health services.
- Turkey emphasizes the need for international burden-and responsibility-sharing and supports voluntary, safe, and dignified return of refugees to their home countries.

### Final remarks
- Turkish authorities expressed gratitude for the analytical depth and rigor of the Article IV Consultation and associated policy advice; they will carefully assess recommendations.
- Authorities will continue close work with the Fund, including through the forthcoming FSAP.

*Source: IMF content unit 1turea2021001.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1turea2021001.pdf_