## _cr07362 ## Source details **Canonical URL:** [_cr07362](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07362.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07362.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07362.pdf.json) --- ### Executive Summary — achievements, outlook, and policy priorities - Achievements since the 2001 crisis: - Large output gap closed; public debt ratios sharply down; economic institutions strengthened; financial system normalized. - Drivers of revival: disciplined financial policies, advances in structural reform, political stability, and favorable global conditions. - Persisting problems and vulnerabilities: - Inflation is still high. - Large current account deficit and rapid credit growth expose Turkey to shifts in investor sentiment. - Political uncertainty from upcoming elections amplifies near-term risks. - Structural challenges: low employment, widespread informality, and low financial intermediation. - Near-term growth projections: - Growth is projected at 5 percent this year. - Growth should pick up next year as real interest rates decline and election uncertainties dissipate. - Current account: should narrow owing to softer domestic demand and robust external growth but will likely stay high in the near term. - Risk assessment: - Risks to the outlook are balanced. - Long-term growth expected to range between 5−7 percent, depending on policies and structural reforms. - Policy priorities and recommendations (selected): - Fiscal: contain spending to achieve the primary surplus target of at least 6½ percent of GNP; medium-run balance debt reduction with room for growth-enhancing tax cuts. - Monetary: remain tight until inflation is firmly on a declining path. - Balance-sheet resilience: increase buffers in public and private balance sheets and improve financing structures. - Structural: reduce rigidities in labor and product markets; further privatization in electricity and banking; strengthen financial market institutions and supervision; reverse downward trend in saving. - Caution: avoid labor market reforms imposing upfront fiscal costs without materially reducing rigidities. *Source: _cr07362 - Executive Summary (IMF).* ### Large capital inflows — benefits and vulnerabilities - Lira appreciation and financing: - Lira up over 30 percent since end-2002 in real terms. - Improved composition of external financing, but short-term debt rollover requirements remain high. - Stock of nonresidents’ portfolio investment at record levels. - Reserve coverage and exposure: - Reserve coverage described as “still-low”. - Turkey exposed more than most peers to shifts in investor sentiment; shocks to emerging markets have non-negligible spillovers onto lira assets. - Banking and private balance sheets: - Rapid credit growth, especially in consumer and housing loans. - Widening maturity mismatches: deposit funding mostly short-term while lending longer/adjustable. - Sovereign and currency risks sizable but declining. - Stress tests (FSSA): sector has substantial capital buffers but vulnerable to large interest and credit shocks. - Household indebtedness increased briskly from a very low base. - Corporate currency-risk assessment impaired by scarce hedging data; indications of widened open foreign currency positions. - Key quantified vulnerability points: - Lira appreciation: up over 30 percent since end-2002 (real terms). - Inflation: driven back above 10 percent in 2006; inflation expectations remain well above the 4-percent target. - Public debt exposure: around one-fifth of net debt linked to foreign currency. ### External balances, gross financing needs, and reserve strategy - Gross external debt baseline (percent of GDP): - 2002: 77.3; 2003: 56.4; 2004: 50.1; 2005: 46.7; 2006: 50.5; 2007: 52.8; 2008: 53.1; 2009: 53.2; 2010: 53.2; 2011: 53.5; 2012: 53.5. - Gross external financing need (US$ billions and percent of GDP): - US$ billions: 2002: 39.9; 2003: 44.9; 2004: 61.6; 2005: 82.3; 2006: 98.5; 2007: 110.5; 2008: 108.7; 2009: 119.0; 2010: 128.5; 2011: 134.4; 2012: 140.2. - Percent of GDP: 2002: 23.8; 2003: 17.5; 2004: 19.2; 2005: 22.8; 2006: 24.1; 2007: 26.3; 2008: 23.9; 2009: 24.5; 2010: 25.0; 2011: 24.7; 2012: 24.3. - Reserve strategy and implication: - Central bank to gradually build international reserves via daily purchase auctions. - Daily foreign-currency purchases would have to be increased by US$20 million (from current daily average of USD$30 million) to achieve 100 percent reserve coverage by end-2008. - Vulnerability comparisons (2006): low reserves-to-short-term debt ratio; sizable current account deficit (percent of GDP); high gross external debt (percent of GDP); elevated public sector financing requirement (percent of GDP); strong change in private credit to GDP (percent); significant gross public debt (percent). ### Growth outlook, scenarios, and risks - Historical and near-term growth: - 2006 growth moderated to 6 percent from 7½ in 2005. - Growth could slow to 5 percent this year with tight monetary policy and election uncertainty. - Projected cyclical upswing to 6 percent in 2008 as uncertainties dissipate and real interest rates decline. - Medium-term projection: growth settles at 5 percent from 2009 onward absent renewed reform momentum. - Authorities’ five-year plan target: 7 percent. - Current account projection: - May have peaked in 2006; expected to decline in 2007 with softer domestic demand and robust external demand. - Reserves projected to rise further but remain below short-term external debt (at remaining maturity). - Alternative scenarios (illustrative): - Baseline: growth settling at 5 percent from 2009. - Strong reform: higher growth (illustrated up to 8 percent) with large inflows and wider current account deficits, mitigated by stronger export productivity. - Low-growth scenario: deficits decline gradually supported by modest recovery in domestic saving and deceleration in investment. - Risk channels: - Downside: financial market and political turbulence causing lower capital inflows, higher interest rates, weaker currency — dampening growth but reducing current account deficit. - Upside: removal of election-related uncertainties could attract large inflows, boosting growth but widening current account deficit. - Commodity prices will significantly affect current account developments. ### Fiscal policy, public debt targets, and fiscal-rule considerations - Short-run fiscal stance and targets: - High primary surpluses averaging 6.7 percent of GNP since 2002 supported debt reduction and lower interest rates. - Short-term measures: authorities blocked some 0.8 percent of GNP in outlays to offset 2006 spending overruns and close state enterprise gaps; implementation should enable a primary surplus of some 6.7 percent of GNP for the year. - Staff recommends preserving the 6.5 percent of GNP primary surplus target in 2008. - Medium-term fiscal path and targets: - Projected net debt target: 27 1/2 percent of GNP by 2012 (scenario preserves 6.5 percent anchor through 2008, subsequent gradual decline). - Baseline fiscal path: declining primary surplus from 6.5 percent of GNP to 5.5 percent in 2009, and further to 3 percent by 2012. - Fiscal space and tax reform costs: - Each 10 percentage point cut in employer (employee) social security contributions estimated to cost 1.3 (1.8) percent of GNP. - Elimination of bank transaction taxes would cost 0.8 percent of GNP. - Projections assume no privatization receipts after 2007 and a high real interest rate (10 percent). - Fiscal-rule considerations: - A well-designed fiscal rule (expenditure rule or balanced budget rule) combined with a debt target could anchor medium-term objectives. - Authorities favor exemptions for investment spending; staff cautions against opportunistic reclassification. ### Public debt dynamics, stress tests, and tailored scenarios - Public sector debt trends (percent of GNP): - Public sector gross debt: 2001: 107.3; 2002: 93.4; 2003: 83.2; 2004: 77.3; 2005: 71.6; 2006: 63.1; 2007: 57.6; 2008: 52.5; 2009: 47.9; 2010: 43.7; 2011: 39.9; 2012: 36.4. - Public sector net debt: 2001: 90.4; 2002: 78.4; 2003: 70.3; 2004: 64.0; 2005: 55.3; 2006: 44.8; 2007: 40.9; 2008: 36.5; 2009: 33.1; 2010: 31.0; 2011: 29.1; 2012: 27.5. - Share of public sector debt denominated in foreign currency (percent of GNP): 2001: 55.4; 2002: 45.1; 2003: 30.5; 2004: 24.9; 2005: 13.7; 2006: 8.5; 2007: 10.2; 2008: 9.1; 2009: 8.3; 2010: 7.8; 2011: 7.3; 2012: 6.9. - External debt shocks (selected sensitivity results): - Permanent ½ standard deviation growth shock → increase of 8 percentage points in gross external debt ratio by 2012. - Permanent ½ standard deviation current account shock → increase of 11 percentage points by 2012. - ¼ standard deviation joint shock to growth, current account, and interest rates → raise ratio by 10 percentage points by 2012. - One-time real depreciation shock of 30 percent in 2008 → gross external debt ratio jumps almost 25 percentage points to 77 percent before declining. - Tailored public debt stress scenarios (C-series) — selected outcomes (net debt percent of GNP): - C1 (Deterioration in global environment): net debt reaches 47.2 (2007) and 47.0 (2008). - C2 (Turkey-specific shift in investor sentiment): net debt reaches 56.4 (2007) and 55.3 (2008). - C3 (Domestic policy complacency starting in 2007): net debt reaches 47.0 (2007), 50.2 (2008), 53.7 (2009), 57.4 (2010), 62.1 (2011), and 65.3 (2012). - Policy implication: maintaining fiscal discipline and high primary surpluses is essential to prevent explosive debt dynamics. ### Monetary policy, inflation dynamics, and inflation-targeting framework - Disinflation experience: - Disinflation trend slowed in 2005; in 2006 lira depreciation and supply shocks drove inflation back above 10 percent. - Headline CPI inflation returned to double digits; inflation expectations (12 and 24 months ahead) hover well above the 4-percent target. - Central bank projections and risks: - Central bank projects end-2007 inflation in a 4.5–7.1 percent range (70 percent probability), converging to the 4 percent target as the mid-point only by the second quarter of 2008. - Forecast assumes unchanged policy rates in Q2 and Q3 and gradual easing thereafter. - Upside near-term risks: services inflation stickiness; second-round effects from unprocessed food prices; unanticipated domestic-demand strength; currency swings. - Policy stance and institutional issues: - Little alternative to keeping monetary policy tight in the near term; current level and tightening bias appropriate. - Interest rates could be cautiously reduced once inflation is on a firm downward trend; timing uncertain. - Preserve central bank independence and enhance communications; IT framework faced immediate challenges after lira depreciation and supply shocks. ### Financial intermediation, banking-sector policies, and supervision - Financial deepening while safeguarding bank soundness: - Rapid financial system growth narrowed banking margins and heightened risk-taking incentives. - Increased foreign control stimulated competition and balance sheet growth; three public banks still large. - Nonbank institutions lagged. - Treasury and central bank measures: - Treasury: lengthen debt maturities and reduce domestic foreign-currency debt; issue inflation-indexed bonds; preserve central bank deposits as liquidity buffer. - Central bank: gradual reserve accumulation via predictable daily purchase auctions. - Mortgage market and credit deepening: - New mortgage law introduces adjustable-rate mortgages and strengthens regulatory infrastructure for primary and secondary markets. - Authorities resisted tax deductibility of interest payments. - Need for strict supervision and prudent loan conditions (e.g., loan-to-value ratios) to avoid amplifying cycles. - Prudential measures: - Increase general provisions for performing loans; target 12 percent capital adequacy ratio for all banks. - Recommendation to tighten provisions for “special mention” loans and consider dynamic provisioning. - Improve consolidated supervision; consider unifying financial supervision under a single body (under study). - Expand credit bureau coverage to firms. - State bank privatization: - IPO for 20−25 percent of government’s share in Halkbank underway. - Staff urged sale of residual stakes and immediate launch of Ziraat privatization; authorities reluctant. ### Reversing the downward trend in saving and SDIF asset recovery - Domestic saving has fallen; higher public saving only partly offset private saving decline. - Policy recommendations to raise saving: continued fiscal prudence, pension reform, deepen capital markets, develop private retirement plans. - SDIF recovery figures (selected, end-2006 and notes): - Note: In 2007, expected amount to be repaid to the Treasury is US$ 1.6 billion. - Recovery-related items presented in tabular form in source (principal amounts, interest, and recovery rates). ### Structural reforms, labor market, informality, and competitiveness - Structural constraints: - Low financial intermediation (Private Credit to GDP low relative to peers). - Declining domestic saving rate. - Long-term fiscal pressures from pensions and health; weak tax enforcement. - Potential electricity supply bottlenecks; large informal sector; low employment, especially among women. - High tax burden on labor and generous social security entitlements. - High minimum wages and rigid labor regulations; high start-up costs for businesses. - Labor market reform priorities (staff suggestions): - Liberalize temporary employment. - Ease hiring requirements. - Lower severance payments while loosening eligibility for unemployment insurance. - Differentiate or ease minimum wage regionally. - Narrow tax wedge on labor, contingent on spending restraint. - Informality: - Unregistered businesses employ half of Turkey’s workers; about 75 percent in firms of 1−4 employees. - Informal sector accounts for roughly a third of Turkey’s economy. - Informality revenue loss estimated roughly 5 percent of GNP. - Productivity in informal sector estimated about one seventh that of the formal sector. - Employment and productivity metrics (selected): - Employment: 18.91 million. - Labor productivity (thousands of U.S. dollars per worker): entries include 4.24; 3.75; 3.73; 7.20. - Minimum wage hikes: almost 50 percent in real terms during 2001−06. ### Energy sector — Box 4: structure, risks, and reform priorities - Sector structure: electricity dominated by state economic enterprises (SEEs); transmission and distribution essentially controlled by SEEs. - Cost pressures and tariffs: - Heavy reliance on natural gas whose price has risen sharply. - Hydro buffer constrained by below-average rainfall. - End-user tariffs not raised since 2002; household tariffs low by international standards; industry tariffs fallen in relative terms but remain elevated due to cross-subsidization. - SEEs’ financial condition: - Theft and poor collections; total system losses almost three times the OECD average; in some regions loss ratios exceed 60 percent. - Underinvestment due to tight finances; electricity shortages may emerge as soon as 2009. - Policy recommendations: - Prompt resumption of privatization program critical. - Privatization requires firm commitments to bring end-user tariffs back to full cost recovery and to avoid political interference with pricing. ### Data provision, quality, and dissemination - Turkey subscribes to the SDDS; data provision broadly adequate despite shortcomings. - National accounts shortcomings: - Outdated base year 1987; use of value-added ratios maintained since 1990; single deflation used for production at constant prices. - Turkstat compiling national accounts per 1968 SNA; revisions and improvements planned to align with 1993 SNA and Data ROSC recommendations. - Frequency and timeliness (selected): - CPI: monthly, latest observation April 2007, Date received 05/03/07. - GDP/GNP: quarterly, latest observation 2006 Q4, Date received 04/02/07. - Gross external debt: quarterly, latest observation 2006 Q4, Date received 03/30/07. - Balance of payments and IIP: - Compiled in broad conformity with BPM5. - Central bank reports quarterly BOP data to STA with about four months lag. - Government finance statistics: - Monthly budgetary data with 2−3 week lag; coverage incomplete due to extra budgetary funds and quasi-fiscal operations. - Monetary and financial statistics: - Central bank balance sheet and main aggregates: weekly publication with short lags; monetary survey and deposit interest rates published monthly with ~2–3 month lag. - IMF relations and selected financials (selected): - Membership date: March 11, 1947. - Quota: 1,191.30 (Millions of SDRs). - Latest Stand-By Arrangement approval 05/11/05, expiration 05/10/08: Amount Approved 6,662.04 (Millions of SDRs); Amount Drawn 3,664.12 (Millions of SDRs). - Projected payments to Fund (Expectations Basis, millions of SDRs): 2007 Total 2,077.88; 2008 Total 1,444.12; 2009 Total 1,805.02; 2010 Total 876.00. ### Executive Board assessment — selected findings and recommendations - Key findings: - Average annual growth of 7½ percent since 2002 led by private consumption and investment. - Inflation has fallen but remains above target; inflation inertia and supply shocks persist. - Public debt ratios and banking sector resilience improved; new vulnerabilities from capital inflows, lira appreciation, and widening current account. - Directors’ policy recommendations (selected): - Maintain fiscal and monetary discipline; preserve floating exchange rate as shock absorber. - Build buffers in balance sheets; increase international reserves gradually and predictably. - Sustain tight fiscal policy—possibly underpinned by a fiscal rule—to reduce debt and support disinflation. - Adopt revised social security legislation preserving 2006 reform savings as soon as possible. - Endorse central bank’s tight stance and defer interest rate cuts until inflation firmly on path toward 4 percent. - Deepen financial intermediation while preserving soundness: tighten provisioning, step up supervision, improve corporate data timeliness. - Remove impediments to employment creation and labor productivity; ease labor regulation and consider labor tax reductions consistent with debt reduction. - Advance privatization and restructure energy sector to allow better cost-recovery pricing. *Source: IMF staff report material (content unit: _cr07362).* ### Executive Summary ### Executive Summary ### Achievements and challenges: Economic revival and remaining structural issues - Considerable progress since the 2001 crisis: the large output gap closed, public debt ratios sharply down, economic institutions strengthened, and the financial system normalized. - Drivers of the revival: disciplined financial policies, advances in structural reform, political stability, and favorable global economic conditions. - Persisting problems and new vulnerabilities: - Inflation is still high. - New vulnerabilities associated with strong economic performance include a large current account deficit and rapid credit growth, exposing Turkey to shifts in investor sentiment. - Political uncertainty from upcoming elections amplifies near-term risks. - Structural challenges that impede durable growth: low employment, widespread informality, and low financial intermediation. ### Outlook and risks - Near-term growth projections: - Growth is projected at 5 percent this year. - Growth should pick up next year as real interest rates decline and election uncertainties dissipate. - Current account: - The current account deficit should narrow owing to softer domestic demand and robust external growth, but will likely stay high in the near term. - Risk assessment: - Risks to the outlook are balanced. - Long-term growth is expected to range between 5−7 percent, depending on the quality of macroeconomic policies and the pace and breadth of structural reforms. ### Discussions with authorities and staff conclusions - Consensus that the recovery strategy from the 2001 crisis had been appropriate and successful. - Key policy pillars going forward: entrenching stability and rejuvenating structural reform. - Fiscal and monetary policy issues discussed: - When the primary fiscal surplus target could be eased. - How the inflation target could be achieved. - How to protect the economy from vulnerabilities stemming from large capital inflows. - Structural reform goals discussed as a pro-growth agenda. - Staff cautioned against labor market reform proposals that impose upfront fiscal costs without substantially reducing labor market rigidities. - The authorities viewed favorably staff’s proposal to adopt a fiscal rule to anchor medium-term fiscal objectives, but were not yet ready to commit to it. - Article IV discussions timing: held in Istanbul and Ankara during March 1−7. ### Policy priorities and recommendations - Fiscal policy: - To preserve market confidence and facilitate disinflation, spending should be contained to achieve the primary surplus target of at least 6½ percent of GNP. - In the medium run, fiscal policy needs to balance continued debt reduction with the need to make room for growth-enhancing tax cuts on labor and financial transactions. - This places a premium on measures to contain spending, such as social security and civil service reform. - Monetary policy: - Monetary policy should remain tight until inflation is firmly on a declining path. - Balance-sheet resilience and financing structures: - To enhance resilience to shocks, buffers in public and private balance sheets should be increased and financing structures improved. - Structural reforms to raise potential growth: - Reduce rigidities in labor and product markets. - Further privatization in electricity and banking. - Strengthen financial market institutions and supervision. - Reverse the downward trend in saving. - Caution on reform sequencing: - Avoid labor market reforms that impose significant upfront fiscal costs without commensurate reductions in rigidities. *Source: _cr07362 - Executive Summary (IMF).* ### 9. Large capital inflows have brought ### _cr07362 - 9. Large capital inflows have brought ### Large capital inflows: benefits and vulnerabilities - Surging capital inflows have appreciated the lira (up over 30 percent since end-2002 in real terms) and, together with higher oil prices, have widened the current account deficit. - Improved composition of external financing flows, but: - Short-term debt rollover requirements remain high. - The stock of nonresidents’ portfolio investment has reached record levels, reflecting strong international investor appetite for lira assets and carry trades. - Combined with still-low reserve coverage, Turkey is exposed more than most other emerging market countries to changes in investor sentiment, as seen during last year’s financial market turmoil. - Shocks to emerging markets have non-negligible spillovers onto lira assets and vice versa. ### External balances, financing needs, and reserve coverage - The downward trend in external debt has reversed and gross financing requirements have risen. - Reserve coverage is characterized as “still-low” (see vulnerability comparisons across emerging markets). - Key comparative vulnerability indicators (2006) highlighted: - Reserves-to-Short-Term Debt Ratio (percent): Turkey ranks low relative to many peers (chart referenced). - Current Account (percent of GDP): Turkey shows a sizable deficit relative to selected peers (chart referenced). - Gross External Debt (percent of GDP): Turkey is among higher values in the sample. - Public Sector Financing Requirement (percent of GDP): Turkey is an elevated case among peers. - Change in Ratio of Private Credit to GDP (percent): Turkey shows strong credit growth relative to peers. - Gross Public Debt (percent of GDP): Turkey’s gross public debt is significant in international comparison. ### Exchange rate, market sentiment, and competitiveness - The lira proved highly sensitive to global market sentiment (FX–VIX sensitivity charts), suffering more than other EM currencies in May/June turbulence, partly reflecting greater underlying vulnerabilities. - Evidence on lira misalignment is mixed: - Some conventional measures suggest overvaluation. - Export performance has so far been good; exports continue to gain market shares albeit at a moderating pace. - Relative unit labor costs and real wages remain near historical averages; real wage growth has been kept below surging labor productivity, offsetting some REER appreciation effects. - Competitiveness has weakened in some industries (notably the large textile sector), which also faces quota elimination—consistent with structural transformation as Turkey moves up the technology ladder. - Real Effective Exchange Rate (2000=100) series show CPI-based and ULC-based REER and their 15-year averages (chart referenced). ### Banking sector and private balance sheets - Bank balance sheets have generally become more resilient; banks addressed many weaknesses from the 2001 crisis. - Remaining concerns: - Rapid credit growth (especially in consumer and housing loans). - Widening maturity mismatches: deposit funding is mostly short-term while lending has longer or adjustable profiles. - Sizable, albeit declining, sovereign and currency risks. - Stress tests (FSSA) are generally encouraging: although vulnerabilities exist to large interest and credit quality shocks, the sector as a whole has substantial capital buffers. - Household sector: indebtedness has increased briskly from a very low base, outpacing asset or disposable income growth. - Corporate sector: assessment of currency risks is impaired by scarce data on hedging; indications that open foreign currency position may have widened sharply. - Banking-sector indicators (before/after May–June turbulence, 2006) show: - Limited impact of turbulence on balance sheets. - Temporary decline in capital adequacy (CAR) for state and private banks. - Banks marked-to-market large holdings of for-sale securities, affecting provisioning and operational metrics. - Lending growth slowed sharply; interest margins came under pressure. ### Public debt and fiscal risks - Public debt ratios are still relatively high, constraining implementation of countercyclical policy and bidding up interest rates. - Stress tests show debt could become unsustainable if fiscal discipline were abandoned. - Exposure to interest rate and currency volatility is non-negligible: - Maturities are still short. - Around one-fifth of net debt is linked to foreign currency. - International comparisons show Turkey’s gross public debt ratio relative to emerging markets and EU benchmarks (charts referenced). - Duration of central government debt: cash domestic lira debt shown in months and eurobond debt in years (chart referenced). ### Inflation, monetary policy, and expectations - Disinflation process experienced a setback: - Disinflation trend slowed in 2005 owing to buoyant domestic demand and increased downward rigidity in wages and prices. - In 2006, lira depreciation and supply-side shocks (unprocessed food, oil, and gold prices) drove inflation back above 10 percent. - Since then, actual and expected inflation have remained well above target—despite sharp monetary tightening and slowdown in activity—raising long-term interest rate volatility and exacerbating balance sheet risks. - Specific inflation metrics: - Headline CPI inflation returned to double digits. - Inflation expectations (12 months and 24 months ahead) hover well above the 4-percent target. - Producer Price Index (PPI) inflation remains elevated. - Services inflation exhibits stickiness relative to goods inflation. - Monthly-seasonally-adjusted CPI shows broad-based price pressures. - Real wage growth has accelerated recently, adding to inflationary pressures. ### Structural challenges and reform agenda - Progress has been made in privatization and bank and fiscal structural reforms, but the agenda remains far from complete. - Structural constraints: - Low financial intermediation constraining investment opportunities (Private Credit to GDP, 2005: Turkey low relative to peers). - Declining domestic saving rate heightening dependence on foreign inflows. - Long-term fiscal spending pressures (pensions and health) and weak tax enforcement limit room to ease heavy tax burden. - Potential bottlenecks in electricity supply suggest need for greater private sector involvement in energy. - Large informal sector with lagging productivity. - Low employment, especially among women, pointing to excessive regulatory and tax burdens on labor. - High tax burden on labor and overly generous social security entitlements threaten fiscal solvency. - High minimum wages and rigid labor regulations; comparatively high start-up costs weigh on the business environment. - Tackling these structural challenges could raise economic growth to rates seen in Turkey’s most successful emerging market peers and accelerate convergence to EU incomes. ### Summary of key quantified points and indicators - Lira appreciation: up over 30 percent since end-2002 in real terms. - Inflation: driven back above 10 percent in 2006; inflation expectations remain well above the 4-percent target. - Public debt exposure: around one-fifth of net debt linked to foreign currency. - Banking sector: stress tests show substantial capital buffers; provisioning and operational expense dynamics noted in 2005 and 2006. - External vulnerability metrics and comparative charts presented for 2006 (reserves-to-short-term debt ratio, current account percent of GDP, gross external debt percent of GDP, public sector financing requirement percent of GDP, change in private credit to GDP percent, gross public debt percent of GDP). *Source: IMF staff assessment as presented in the referenced chapter.* ### 15. The impetus to growth from the post-crisis stabilization shows signs of ebbing. In ### _cr07362 - 15. The impetus to growth from the post-crisis stabilization shows signs of ebbing. In ### Growth outlook - 2006 growth moderated to 6 percent from 7½ in 2005, reflecting higher interest rates and weaker consumer confidence following last year’s financial market turbulence. - The composition of growth became more balanced with increased reliance on net exports. - With monetary policy expected to remain tight and election uncertainties weighing on confidence: - Growth could further slow to 5 percent this year, widening the output gap modestly. - As election-related uncertainties dissipate and real interest rates decline, current policies are projected to result in a cyclical upswing in growth to 6 percent in 2008. - Medium-term projection: - With disciplined financial policies, but in the absence of renewed reform momentum, growth is projected to settle at 5 percent from 2009 onward. - Authorities’ target in their current five-year economic plan: 7 percent. ### Current account and external financing - The current account deficit may have peaked in 2006. - Softer domestic demand and robust growth in Turkey’s main trading partners should reduce the current account deficit in 2007. - External financing prospects are expected to remain benign, underpinned by strong FDI, and reserves are projected to rise further. - Even so, reserves would remain below short-term external debt (at remaining maturity). ### Risks and alternative scenarios - Main downward risks to growth: financial market and political turbulence. In that event: - Lower capital inflows combined with higher interest rates and a weaker currency would dampen growth but reduce the current account deficit. - Upside risk: removal of election-related uncertainties (and prospects for a strong, single-party government) could lift investor confidence and attract large inflows, boosting growth but widening the current account deficit. - Commodity prices will significantly affect current account developments. - Illustrative alternative growth scenarios (2007–2012): - Baseline scenario: path consistent with projections noted above (growth settling at 5 percent from 2009). - Strong reform scenario: higher growth (illustrated up to 8 percent in the chart) attainable with ambitious structural reforms; would likely result in large inflows and wider current account deficits, though stronger export sector productivity could mitigate deficits. - Long-term current account behavior: - Low-growth scenario: current account deficit expected to decline gradually, supported by a modest recovery in domestic saving and a deceleration in investment (predicated on benign external outlook, improving fiscal balances as the interest bill declines, and broadly unchanged competitiveness). - Strong-reform scenario: high growth and attractive investment conditions would widen deficits, with financing prospects favorable provided market confidence is preserved. ### Policy assessment and priorities (IV. POLICIES TO ENTRENCH MACROECONOMIC STABILITY AND SUPPORT GROWTH) - Consensus: overall strategy for normalizing the economy since 2001 was appropriate and successful. - Broad thrust: primary budget surplus as fiscal anchor, goal of reducing inflation quickly, substantial strengthening of bank supervision and bank balance sheets, and important structural reforms. - Shortcomings in implementation: - Composition of fiscal adjustment relied too much on revenue increases and capital spending restraint. - Some reforms lagged initial schedules, especially expenditure rationalization, labor market deregulation, capital market deepening, and privatization of public banks and energy companies. - Agreed redirection of policies: - Entrenching stability and rejuvenating structural reform are key pillars. - Priority reforms to safeguard fiscal and external positions: structural fiscal reforms and regulatory improvements to labor, financial, and product markets. - Authorities place particular priority on easing the heavy tax burden. ### Fiscal policy: adapting to evolving needs - Tight fiscal policy has been cornerstone: high primary surpluses averaging 6.7 percent of GNP since 2002 have supported private sector-led growth by reducing debt ratios and enabling lower interest rates and risk premiums. - Fiscal adjustment issues: - Relied excessively on tax increases and investment cuts, and too little on current expenditure rationalization. - Large one-off revenues used to accommodate higher spending last year: primary surplus adjusted for exceptional items fell to around 5 percent of GNP even though headline figure was 6.6 percent of GNP. - Short-term measures and targets: - Authorities blocked some 0.8 percent of GNP in outlays to (i) offset 2006 spending overruns, (ii) compensate for several unbudgeted initiatives, and (iii) close the gap in the state enterprise balance opened by failure to effect planned hikes in end-user energy tariffs. - Implementation of these measures should enable a primary surplus of some 6.7 percent of GNP for the year. - Achieving this will require resolve given the scale of targeted adjustment, election-related pressures, and indications of softening tax revenue. - Medium-term stance: - Continued progress in debt reduction should allow a gradual easing of the primary surplus. - Staff recommends preserving the 6.5 percent of GNP primary surplus target in 2008, since key reforms (notably pension and civil service reforms) are not yet in place. - Staff projections indicate it should be possible to reduce the primary surplus from 2009 onward while balancing the budget and generating fiscal space, absent shocks. - Projected net debt target: 27 1/2 percent of GNP by 2012 (scenario preserves 6.5 percent anchor through 2008, subsequent gradual decline calibrated to secure further reduction in net debt to 27 1/2 percent of GNP by 2012). - Fiscal rule considerations: - A well-designed fiscal rule (expenditure rule or balanced budget rule) could serve as an anchor; an expenditure rule combined with a debt target would be more conducive to expenditure restraint. - Authorities suggest exempting investment spending from such a rule; staff fears this could promote opportunistic reclassifications. - Authorities feel it is still too early to replace the primary surplus target with an untested alternative. - Budget accountability and transparency: - Public financial management and control law adopted in 2003 needs full implementation (medium-term performance-based budgeting, annual accountability reports, mid-year fiscal outlook). - Authorities are making efforts to improve fiscal transparency. ### Fiscal space and tax reform tradeoffs - Fiscal space depends on assumptions on real primary spending growth and constraints: - Projections assume achieving net debt ratio of 27.5 percent by 2012. - Each 10 percentage point cut in employer (employee) social security contributions is estimated to cost 1.3 (1.8) percent of GNP. - Elimination of bank transaction taxes would cost 0.8 percent of GNP. - Projections conservatively assume (i) no positive supply-side feedback from cuts in distortionary taxes; (ii) no privatization receipts after 2007; (iii) no revenue buoyancy; and (iv) a high real interest rate (10 percent). - Three spending-growth cases illustrated: - I. Primary spending grows at 9 percent (Vs. 10.5 percent in 2004-06): unconstrained, primary spending expands to fill all fiscal space created by declining debt. - II. Primary spending grows with output: with moderate restraint, some fiscal space is left to gradually lower labor and financial taxes. - III. Primary spending grows less than output (4 percent): especially distortionary taxes could be cut much faster with tight primary spending control. ### Monetary policy: disinflation is the primary objective - Agreement to preserve the 4 percent medium-term inflation target. - Central bank projections and risks: - Central bank projects end-2007 inflation in a 4.5–7.1 percent range (70 percent probability), converging to the 4 percent target as the mid-point only by the second quarter of 2008. - Forecast based on unchanged policy rates in the second and third quarters of this year and gradual easing thereafter. - Upside risks to the near-term inflation outlook: (i) difficulty in breaking services inflation; (ii) possible second-round effects from the recent spike in unprocessed food prices; and (iii) unanticipated strength in domestic demand (due to fiscal spending pressures or weaker-than-expected effects from past interest rate hikes). Currency swings are an additional source of risk. - Policy stance: - Little alternative to keeping monetary policy tight in the near term; the level of interest rates is appropriate and the central bank’s tightening bias is appropriate. - Once inflation is on a firm downward trend, interest rates could be cautiously reduced; timing is difficult. - Central bank’s central scenario: beginning rate cuts in the fourth quarter of 2007 is a conditional statement, not a commitment. - Focus will be on trends in actual inflation, especially services inflation, given lagged leading indicators. - Institutional and framework issues: - Preserving central bank independence and enhancing the monetary policy framework are crucial. - Before adopting formal inflation targeting in January 2006, the central bank increased transparency (predictable timing of interest rate decisions, monetary policy committee responsibility, quarterly Inflation Report). - The new IT framework quickly faced challenges due to lira depreciation and supply shocks leading to a large breach of the inflation target. - While reserve accumulation has resulted in high sterilization costs affecting central bank income, the central bank stresses this will not jeopardize operational independence. ### Exchange rate and policy mix considerations - Rebalancing policy mix (monetary easing with fiscal tightening) could, in principle, alleviate upward pressure on the lira, but: - Not seen as pressing with the current account seemingly stabilizing. - Fiscal policy is already quite tight and further tightening might not be credible. - Central bank wary of easing monetary policy prematurely while inflation remains well above target. - Policy implications: - Strong lira argues for keeping fiscal policy tight to create room for lowering high real interest rates. - Important to advance supply-side reforms to improve competitiveness and to build cushions in balance sheets to minimize disruptions from a possible disorderly lira correction. *Source: _cr07362 - 15. The impetus to growth from the post-crisis stabilization shows signs of ebbing. In — PDF; canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07362.pdf* ### 35. The authorities are further strengthening public balance sheets to increase ### _cr07362 - 35. The authorities are further strengthening public balance sheets to increase ### E. Deepening Financial Intermediation While Safeguarding Bank Soundness - Recent rapid growth of the financial system has facilitated economic recovery but created challenges: narrowing banking margins (most pronounced in smaller banks) has heightened incentives for risk taking. - Banking system developments: - Increased foreign control has spurred competition and balance sheet growth. - Banks continue to hold the lion’s share of financial sector assets; three public banks retain a large role. - Nonbank institutions (mostly controlled by banks) have lagged. - Policy measures and reforms: - Treasury strategy: lengthen debt maturities and reduce domestic foreign-currency debt (including by issuing inflation-indexed bonds) to mitigate market and rollover risks; preserve adequate central bank deposits as a liquidity buffer. - Central bank: limit further deterioration in reserve coverage by gradually building up international reserves through daily purchase auctions; willing to increase daily purchases if market conditions are favorable, but emphasizes predictability to support the credibility of the floating exchange rate regime. - Daily foreign-currency purchases would have to be increased by US$20 million (from current daily average of USD$30 million) in order to achieve 100 percent reserve coverage by end-2008. - Mortgage law and credit deepening: - Newly adopted mortgage law should foster intermediation by introducing adjustable-rate mortgages (reducing maturity mismatches) and strengthening regulatory infrastructure for primary and secondary markets (increasing competition from nonbank lenders). - Authorities resisted introducing tax deductibility of interest payments. - A growing mortgage market could amplify cycles and fuel rapid credit growth; strict supervision and prudent regulation of mortgage conditions (such as loan-to-value ratios) are needed. - Other measures to deepen financial development: - Remove obstacles: private credit to GNP remains lower than comparators; substantial private lending intermediated through banks’ offshore branches to circumvent taxation and foreign currency lending restrictions. - Deposit maturities remain very short; high degree of deposit dollarization. - Authorities expect deposit maturities and dollarization to improve gradually as low inflation becomes entrenched; launching inflation-indexed bonds will help. - High priority on phasing out financial transaction taxes to reduce intermediation margins and bring back onshore banking activity. - Commit to adopt pending insurance and capital markets legislation to deepen equity, corporate bond, and insurance markets, increasing demand for long-term lira debt instruments. - Prudential buffers and supervision: - Recent moves: increase general provisions for performing (“pass”) loans and instruct all banks to target a 12 percent capital adequacy ratio. - Recommendation: further tighten provisions, particularly for “special mention” loans where provisioning is more lenient than in other countries; consider introducing dynamic provisioning as an alternative. - Supervisory practice improvements urged to align with high standards of the new banking law; assessing risks on a consolidated basis becomes key as the system grows more complex. - Unifying financial sector supervision under a single body is an option under study; authorities prefer further study. - Improve coverage and timeliness of corporate financial statements; strengthen accounting and auditing practices. - Intend to expand credit bureau information to cover firms to facilitate credit risk assessment. - State bank privatization: - IPO for 20−25 percent of the government’s share in Halkbank is underway. - Staff urged sale of residual government stakes within the next year and immediate launch of Ziraat privatization; authorities reluctant to commit given Ziraat’s social role in rural areas. - SDIF and crisis legacy: - SDIF plans to dispose of assets taken over from intervened banks by end-2007. - Related losses (some 11 percent of GNP) will be fiscalized (without affecting headline public debt figures), enabling SDIF to focus exclusively on deposit insurance. ### F. Reversing the Downward Trend in Saving - Domestic saving has fallen; higher public saving has only partly offset a rapid decline in private saving. - Causes and implications: - Trend principally reflects successful macroeconomic stabilization since 2001. - Recovery of saving rates can be expected as income catch-up proceeds but supportive policies needed. - Policy recommendations to raise domestic saving: - Continued fiscal prudence and pension reform. - Deepen capital markets and develop private retirement saving plans. - SDIF asset recovery (selected figures from table): - As of end-2006: A. Debt to Treasury (principal amount) 2/25.7...... - B. Debt to Treasury (principal amount and interest)56.0...... - C. Total recovery, of which: 3/14.07.521.5 - C1. Repayments to Treasury 4/6.59.015.5 - C2. Repayments to other debtors5.20.86.0 - D. Recovery rate for Treasury, excluding interest (C1/A)25.3...... - E. Recovery rate for Treasury, including interest (C1/B)11.6...... - Note: In 2007, the expected amount to be repaid to the Treasury is US$ 1.6 billion. - Saving and investment context: - Turkey: investment and national saving series presented against emerging markets comparators in source charts. - Private saving rates, 2006 shown relative to Emerging Markets, CEE, Asia, Latin America, EU-12 in source charts. ### G. Safeguarding Fiscal Solvency and Creating Fiscal Space - Social security reform: - Critical to securing fiscal sustainability and reducing labor market rigidities. - Turkey’s mandatory pension systems: lowest retirement ages (60 for men and 58 for women) and second-highest benefits relative to pre-retirement earnings in the OECD. - Average Turkish worker with a full career receives an untaxed pension exceeding his/her net pre-retirement salary. - Pension system spends over one-fourth of central government outlays and runs deficits of 3½ percent of GNP, despite some of the highest social security contribution rates in the OECD. - Separate systems for civil servants, private sector employees, and the self-employed hinder labor mobility across sectors. - Comprehensive reform needed: rationalize benefits, gradually raise retirement ages, and integrate systems to secure long-run fiscal sustainability, create fiscal space to ease labor tax burden, and improve labor market flexibility. - Authorities’ plans: - Intend to resurrect the social security reform recently struck down by the Constitutional Court. - Government will publish a white paper discussing alternative approaches aimed at recapturing most of the 2006 reform’s savings in constitutionally valid ways. - A revised reform should be adopted by mid-2008. - Health care efficiency: - Expanding access and moving toward universal coverage preceded efficiency gains, causing health spending overruns. - Authorities plan to strengthen control over public hospital expenditure by setting hospital-by-hospital quarterly budgetary targets. - Implement measures: strengthen information technology, promote more cost-effective treatments, and adjust copayments to reduce frivolous demand. - Expenditure rationalization and tax administration improvements: - Civil servant expenses are high (over one-third of central government primary spending); streamlining via attrition and pay rationalization suggested, with legislative initiatives expected from new parliament. - Substantial scope to improve revenue collection by focusing on highest-yielding activities. - Recent establishment of a Large Taxpayer Unit is welcome; commitments to strengthen audit capabilities, enhance collections of social security contributions, and deploy risk-based audit techniques. - Integrating tax and social security contribution collection critical to yield efficiency and compliance benefits. ### H. Raising Productivity and Enhancing Competitiveness - Labor market reforms to reduce impediments to employment creation and boost productivity; staff suggestions include: - liberalize temporary employment; - ease hiring requirements; - lower severance payments, while loosening eligibility requirements for unemployment insurance; - ease—or at least differentiate regionally—the real minimum wage (which exceeds 150 percent of regional per capita income in the poorer provinces); - narrow the tax wedge on labor, contingent on commensurate spending restraint. - Authorities’ stance: - Agree on need to rationalize regulations and reduce labor tax burden; considering measures including easing restrictive hiring requirements for large firms. - Staff cautioned against increasing unemployment benefits or loosening eligibility requirements without complementary measures to ease severance pay burden due to fiscal risks. - Investment climate: - FDI has soared but remains concentrated in banking, telecommunications, and real estate. - Priorities: entrench economic stability; advance EU accession; revive privatization; pursue microeconomic reforms including easing product market regulations. - Electricity sector concern: - Turkey might face shortages by 2009−10. - Weakened finances of state-owned energy enterprises caused largely by a freeze on end-user electricity tariffs since 2002 while energy input costs have doubled; investment lags. - Resumption of privatization (suspended in early 2007) and strengthened tariff framework based on full cost recovery deemed essential. - Authorities are reassessing their energy strategy. ### V. Data Adequacy - Statistical base broadly adequate for surveillance but national accounts have shortcomings: - GDP data understate economic activity; expenditure-side composition unreliable. - Turkish Statistical Institute has been working on revisions (supported by Fund TA) and intends to release new data later this year; staff advised careful preparation and communications strategy. - Fiscal transparency: - Improving slowly; frequent account reclassifications have hampered public assessment of fiscal performance. - Publication of consistent historical budget outturns under new classification welcomed. - Efforts should focus on ensuring consistency and accessibility of fiscal reporting. - Note: Confusion surrounding a recent revision of the CPI basket weights highlights need for enhanced communications with the public. ### VI. Staff Appraisal (selected findings) - Turkey’s macroeconomic performance in recent years has been impressive. - Disciplined macroeconomic policies, strengthened institutions, and structural reforms have led to disinflation, declining public debt, falling interest rates, and high private sector-led growth. - Favorable external conditions, political stability, and government commitment to Fund arrangements and EU accession facilitated performance. *Source: IMF staff report text as provided in the content unit.* ### 55. Turkey faces, however, several economic and structural challenges that need to ### _cr07362 - 55. Turkey faces, however, several economic and structural challenges that need to ### Major macroeconomic and external challenges - Turkey needs to complete adjustment to large imbalances inherited from the 2001 crisis by: - reducing debt levels; - bringing inflation down to low single digits; - unwinding dollarization. - New vulnerabilities from recent growth, EU accession prospects, and large capital inflows include: - wide current account deficits; - appreciating currency; - rapid credit growth. - These vulnerabilities are unlikely to abate in the near-term and must be managed to avoid boom-bust cycles. ### External vulnerability management and exchange rate policy - The floating exchange rate is a flexible shock absorber and “continues to serve Turkey well.” - The lira’s current strength “heightens risks from sudden shifts in market sentiment,” though it “does not yet appear to have dented export competitiveness.” - A protracted and sharp lira sell-off could be disruptive; policy emphasis should be on: - building buffers in public and private balance sheets; - improving liability structures by lengthening maturities and reducing foreign-currency funding. ### Inflation, monetary policy, and central bank framework - Achieving low single-digit inflation is a fundamental priority; authorities should entrench inflation around the 4 percent target. - Current tightening bias is described as appropriate; once inflation is firmly declining, interest rates “should be cautiously reduced.” - Preserving central bank independence and enhancing communications with markets are essential for the new inflation targeting regime. - Residual inflation uncertainty keeps real interest rates very high. ### Fiscal policy—near-term and medium-term guidance - Tight fiscal policy will help disinflation and buttress market confidence. - Recommendation: ensure policies are consistent with a primary surplus outcome of at least 6.5 percent of GNP this year and next. - Over the medium term, fiscal policy should be anchored to: - reducing public debt to safer levels; - cutting highly distortionary taxes (particularly on employment and financial transactions). - To reverse deterioration in budget quality, adopt measures to keep spending growth in check, including considering an explicit fiscal rule (e.g., formal limit on spending growth or overall deficit). - Required supporting measures for a fiscal rule: improvements in public financial management, fiscal transparency, and reforms to contain nondiscretionary spending. ### Priority public expenditure and social security reforms - Immediate fiscal priorities: - (i) adopt as soon as possible social security legislation achieving similar savings to those targeted under the 2006 reform struck down by the Constitutional Court; - (ii) increase health spending efficiency; - (iii) rationalize civil service pay. - The 2006 parametric pension reform “represented a good attempt at restoring the long-run viability of the pension system” but was annulled by the Constitutional Court. ### Tax administration and revenue mobilization - Reforms to improve tax collection are essential to create fiscal space. - Focus areas: - consolidating audit functions under the Revenue Administration; - making the Large Taxpayer Unit fully effective; - improving social security collections. - Box 1 observations: the 6.5 percent of GNP primary surplus target was largely observed, but buoyant revenues were spent despite commitments to save revenue overperformance. ### Labor market, employment, and productivity reforms - Future growth depends critically on increasing employment and labor productivity through comprehensive labor market reforms. - Policy guidance: - ease high levels of labor regulation and taxation to lower unemployment, increase participation, and reduce the large informal sector; - design reforms to be affordable and avoid expanding unemployment insurance without considerably scaling down the mandatory severance pay regime. ### Financial sector deepening and systemic soundness - Policies should both deepen financial intermediation and preserve financial system soundness. - Recommended actions: - abolish financial transaction taxes; - privatize state banks; - adopt insurance and capital market legislation. - Risks and prudential measures: - rapid credit growth raises the financial system’s risk profile; - build additional cushions by tightening banks’ general provisions (currently low compared to other countries); - increase coverage and timeliness of corporate balance sheet data; - supervisors should step up risk-based supervision and prompt corrective actions when banks assume excessive risks. ### Privatization, investment climate, and energy sector priorities - Privatization and microeconomic reforms will attract investment and boost productivity. - Recent surge in FDI has been concentrated in a few service sectors; broader reforms needed to attract investment across the economy, including reviving privatization and deregulating product markets. - Energy sector urgency: - risk of electricity shortfalls; - need to attract new investment and increase efficiency by privatizing electricity distribution companies and allowing better cost-recovery pricing. ### Informal sector: scale, impacts, and drivers - Scale and structure: - Unregistered businesses employ half of Turkey’s workers—about 75 percent of which are in small firms of 1−4 employees. - Many registered firms are “semi-formal” and underreport sales and employment. - The informal sector accounts for roughly a third of Turkey’s economy. - Trends: - Overall rate of informal employment broadly flat, but informality rising within the non-agriculture sector. - Contributing factors: successive minimum wage hikes (almost 50 percent in real terms during 2001−06), steep social insurance contributions, stringent labor and product market regulations, and weak tax administration. - Fiscal and productivity costs: - Staff estimate the revenue loss from informality to be roughly 5 percent of GNP. - Productivity in the informal sector is estimated at one seventh that of the formal sector. - Productivity and employment metrics (as presented): - Employment (18.91 million) - Labor productivity (thousands of U.S. dollars per worker): 4.24; 3.75; 3.73; 7.20 - Minimum wage hikes: almost 50 percent in real terms during 2001−06 - Estimated revenue loss from informality: roughly 5 percent of GNP - Informal sector share of the economy: roughly a third ### Program performance and structural reform progress (Box 1 highlights) - Stand-By Arrangement objectives: entrench 5 percent growth, reduce inflation to low single digits, contain the current account deficit, and cut the public sector net debt ratio by 10 percentage points. - Outcomes: - Growth and debt objectives were exceeded by large margins. - Performance on inflation and the current account fell short (wider current account deficit due to higher oil prices, above-program growth, and favorable global financial conditions). - Structural reform progress and setbacks: - Tax reform: corporate income tax cut from 30 to 20 percent; phase-out of investment tax allowances; limited expansion of personal income tax base; establishment of an autonomous Revenue Administration and a Large Taxpayer Unit (implementation slower than envisaged). - Pension reform: 2006 parametric reform annulled by the Constitutional Court. - Banking: new banking law, reorganization of supervisory body, new mortgage law adopted in early 2007; state bank privatizations delayed. - Investment climate: record FDI inflows; cancellation of privatization of energy distribution companies raised doubts about future privatization commitment. - Health sector expansion outpaced efficiency measures, straining the budget and requiring new conditionality to curb unnecessary demand and excessive supply of health services. - Energy sector SOEs (SEEs) failed to pass substantial energy cost increases to final users; chronic collection and theft/loss problems hindered investment needed to avoid electricity shortages. ### Strategic outlook and recommendations - Now is the time to launch an ambitious structural reform agenda in the immediate post-election period. - Priority reforms: secure long-term fiscal savings, bolster productivity, raise employment, deepen financial intermediation, and address energy sector bottlenecks. - Successful implementation of structural reforms combined with disciplined monetary and fiscal policies would: - durably raise potential growth; - reduce susceptibility to external shocks by improving ability to sustain current account deficits; - tilt external financing toward more stable sources, such as foreign direct investment. - The agenda is ambitious and may face resistance, but rewards would be sustained improvements in living standards. *Source: IMF staff report excerpt (content unit: _cr07362 - 55).* ### Box 4. Developments in the Energy Sector ### Box 4. Developments in the Energy Sector ### Structure and market participation - Turkey’s electricity sector is dominated by state economic enterprises (SEEs). - Private sector participation in electricity generation exists, but these companies either produce for their own consumption or sell electricity to SEEs. - Transmission and distribution sectors are essentially controlled by SEEs. ### Cost pressures and tariffs - Electricity production in Turkey relies heavily on natural gas, whose price has risen sharply in recent years. - Hydro-based plants have provided some buffer, but below-average rainfall has recently constrained use of this energy source. - End-user tariffs have not been raised since 2002. - Consequence: household tariffs are now low by international standards. - Industry tariffs have fallen in relative terms but remain elevated, reflecting substantial cross-subsidization. ### SEEs’ financial condition and operational losses - SEEs’ financial difficulties have been further compounded by theft and poor collections. - Total system losses are almost three times the OECD average. - In certain regions, loss ratios exceed 60 percent. - Collections are weak, often reflecting political interference (arrears by municipalities are very large) and poor compliance arising from repeated amnesties. ### Investment needs and supply risks - The SEEs’ tight finances have led to persistent underinvestment in critical infrastructure. - Official estimates suggest that electricity shortages may emerge as soon as 2009. - Substantial capital investment is needed to avert supply shortages. ### Policy recommendations and reform priorities - Urgent steps are needed to address the energy sector’s financial problems. - A prompt resumption of the aborted privatization program is critical. - Successful privatization of distribution and, subsequently, generation companies will require: - firm commitments to bring end-user tariffs back in line with the stated principle of full cost recovery; and - a commitment to avoid interfering with the pricing mechanism. *Source: Box 4. Developments in the Energy Sector.* ### 1. The gross external debt ratio is projected to stay at 50 to 55 percent of GNP in ### The gross external debt ratio is projected to stay at 50 to 55 percent of GNP in the medium term ### External debt outlook and baseline projection - The gross external debt ratio is projected to stay at 50 to 55 percent of GNP in the medium term. - This baseline reflects offsetting influences: - A gradually narrowing current account deficit helps reduce the debt-to-GNP ratio. - A fall-off in FDI (nondebt financing) after the 2006−07 surge and somewhat slower growth of real output after 2008 work to increase the ratio. - The baseline assumes the central bank will continue to increase its gross international reserves (financed in part by external debt) to strengthen coverage of short-term liabilities. - Baseline projections for gross external debt (External debt in percent of GDP): - 2002: 77.3 - 2003: 56.4 - 2004: 50.1 - 2005: 46.7 - 2006: 50.5 - 2007: 52.8 - 2008: 53.1 - 2009: 53.2 - 2010: 53.2 - 2011: 53.5 - 2012: 53.5 - Change in external debt (percent of GDP): - 2002: -3.9 (table row header shows overall change for the projection period ending 2012 as -3.9) - Yearly identified external debt-creating flows (4+8+9), current account deficit excluding interest payments, and other flow components are reported in the table for 2002–2012 (selected entries shown below): - Identified external debt-creating flows (2002): -24.7; (2003): -23.9; (2004): -7.6; (2005): -3.3; (2006): -2.9; (2007): 1.2; (2008): 0.7; (2009): 0.9; (2010): 0.5; (2011): -0.1; (2012): -0.8 - Current account deficit, excluding interest payments (2002): -2.9; (2003): 0.4; (2004): 2.6; (2005): 4.0; (2006): 5.3; (2007): 4.9; (2008): 4.6; (2009): 4.1; (2010): 3.5; (2011): 3.0; (2012): 2.6 - Deficit in balance of goods and services (2002): 2.4; (2003): 3.5; (2004): 5.2; (2005): 6.7; (2006): 8.1; (2007): 8.1; (2008): 7.4; (2009): 7.0; (2010): 6.3; (2011): 5.8; (2012): 5.3 - Exports (percent of GDP): 2002: 34.2; 2003: 28.3; 2004: 28.9; 2005: 29.6; 2006: 29.5; 2007: 32.3; 2008: 33.0; 2009: 33.9; 2010: 35.1; 2011: 36.4; 2012: 37.8 - Imports (percent of GDP): 2002: 36.6; 2003: 31.9; 2004: 34.1; 2005: 36.3; 2006: 37.6; 2007: 40.4; 2008: 40.4; 2009: 40.9; 2010: 41.4; 2011: 42.2; 2012: 43.0 - Net non-debt creating capital inflows (negative) (2002): -0.2; (2003): -0.4; (2004): -1.1; (2005): -4.0; (2006): -5.2; (2007): -4.0; (2008): -3.3; (2009): -2.9; (2010): -3.0; (2011): -3.1; (2012): -3.2 - Gross external financing need (in billions of US dollars and percent of GDP): - In billions of US dollars: - 2002: 39.9 - 2003: 44.9 - 2004: 61.6 - 2005: 82.3 - 2006: 98.5 - 2007: 110.5 - 2008: 108.7 - 2009: 119.0 - 2010: 128.5 - 2011: 134.4 - 2012: 140.2 - In percent of GDP: - 2002: 23.8 - 2003: 17.5 - 2004: 19.2 - 2005: 22.8 - 2006: 24.1 - 2007: 26.3 - 2008: 23.9 - 2009: 24.5 - 2010: 25.0 - 2011: 24.7 - 2012: 24.3 ### Vulnerabilities and standardized shock results - Standardized debt sustainability tests show vulnerability to shocks: - A permanent ½ standard deviation growth shock would put the debt ratio on an upward trajectory over 2008–12 and lead to an increase of 8 percentage points in the gross external debt ratio by 2012. - A permanent current account shock of ½ standard deviation would have a somewhat larger effect: 11 percentage points by 2012. - A ¼ standard deviation joint shock to growth, the current account, and interest rates would raise the ratio by 10 percentage points by 2012. - A one-time real depreciation shock of 30 percent in 2008 would cause the gross external debt ratio to jump almost 25 percentage points to 77 percent, before declining gradually over the medium term. - The analysis notes that while sensitivity to exchange rate shocks is large, a depreciation would likely lead to a significant reversal of the current account deficit and improved medium-term debt ratios—a dynamic not captured in the debt sustainability exercise. ### Key macroeconomic assumptions underlying baseline (selected) - Real GDP growth (in percent): - 2002: 7.9 - 2003: 5.9 - 2004: 9.9 - 2005: 7.6 - 2006: 6.0 - 2007: 5.0 - 2008: 6.0 - 2009: 5.5 - 2010: 5.0 - 2011: 5.0 - 2012: 5.0 - GDP deflator in US dollars (change in percent): - 2002: 27.4 - 2003: 44.2 - 2004: 14.1 - 2005: 4.7 - 2006: 6.6 - 2007: -2.0 - 2008: 2.1 - 2009: 1.0 - 2010: 1.0 - 2011: 1.0 - 2012: 1.0 - Nominal external interest rate (in percent): - 2002: 5.6 - 2003: 5.3 - 2004: 5.0 - 2005: 5.2 - 2006: 5.8 - 2007: 5.6 - 2008: 4.9 - 2009: 5.0 - 2010: 4.9 - 2011: 4.8 - 2012: 4.7 - Growth of exports (US dollar terms, in percent): - 2002: 8.0 - 2003: 26.3 - 2004: 27.8 - 2005: 15.7 - 2006: 12.5 - 2007: 12.7 - 2008: 10.6 - 2009: 9.5 - 2010: 9.7 - 2011: 10.0 - 2012: 10.0 - Growth of imports (US dollar terms, in percent): - 2002: 16.3 - 2003: 32.9 - 2004: 34.1 - 2005: 20.1 - 2006: 17.0 - 2007: 10.6 - 2008: 8.3 - 2009: 7.8 - 2010: 7.4 - 2011: 8.0 - 2012: 8.1 - Current account balance, excluding interest payments (percent of GDP): - 2002: 2.9 - 2003: -0.4 - 2004: -2.6 - 2005: -4.0 - 2006: -5.3 - 2007: -4.9 - 2008: -4.6 - 2009: -4.1 - 2010: -3.5 - 2011: -3.0 - 2012: -2.6 - Net non-debt creating capital inflows (percent of GDP): - 2002: 0.2 - 2003: 0.4 - 2004: 1.1 - 2005: 4.0 - 2006: 5.2 - 2007: 4.0 - 2008: 3.3 - 2009: 2.9 - 2010: 3.0 - 2011: 3.1 - 2012: 3.2 ### Public debt sustainability: recent trends and baseline target - Public sector debt ratios fell further in 2006 and are expected to continue declining in the near term, notwithstanding elevated interest rates. - Fiscal discipline is crucial: sticking to high primary surpluses would help prevent explosive debt dynamics under large shocks; fiscal complacency could trigger an adverse scenario with higher interest rates and lower growth that makes public debt unsustainable. - Public sector gross and net debt ratios fell by about 8-10 percentage points in 2006 to around 63 and 45 percent of GNP, respectively. - Baseline scenario target for net public debt: - Net debt ratio at 27½ percent of GNP by 2012—corresponding to a consolidation of over 17 percentage points in 6 years. - Baseline fiscal path: - Declining primary surplus from 6.5 percent of GNP to 5.5 percent in 2009, and further down to 3 percent by 2012. - Real interest rates are conservatively assumed to stay around 10 percent. - Public sector debt projections (selected): - Public sector gross debt (percent of GNP): - 2001: 107.3 - 2002: 93.4 - 2003: 83.2 - 2004: 77.3 - 2005: 71.6 - 2006: 63.1 - 2007: 57.6 - 2008: 52.5 - 2009: 47.9 - 2010: 43.7 - 2011: 39.9 - 2012: 36.4 - Public sector net debt (percent of GNP): - 2001: 90.4 - 2002: 78.4 - 2003: 70.3 - 2004: 64.0 - 2005: 55.3 - 2006: 44.8 - 2007: 40.9 - 2008: 36.5 - 2009: 33.1 - 2010: 31.0 - 2011: 29.1 - 2012: 27.5 - Share of public sector debt denominated in foreign currency (percent of GNP): - 2001: 55.4 - 2002: 45.1 - 2003: 30.5 - 2004: 24.9 - 2005: 13.7 - 2006: 8.5 - 2007: 10.2 - 2008: 9.1 - 2009: 8.3 - 2010: 7.8 - 2011: 7.3 - 2012: 6.9 ### Public debt stress tests and tailored scenarios - Stress tests indicate debt dynamics could become unsustainable if fiscal discipline is abandoned or a combination of very large shocks occurs. - Tailored scenarios (C-series) and outcomes: - C1. Deterioration in global environment (liquidity tightening and low world growth): - Assumptions: 30 percent depreciation in 2007, interest rates increase by 500 bps in 2007–08, growth falls to 2½ percent in both years; from 2009–12 interest rates ease by 100 bps each year and growth gradually returns to baseline. - If the primary surplus remains at baseline, net debt ratio would increase to over 47 percent of GNP by 2010 and then decline gradually thereafter. - C2. Turkey-specific shift in investor sentiment (sharp capital flow reversal): - Assumptions: 50 percent depreciation in 2007, interest rates rise by 1000 bps in 2007 and 500 bps in 2008 above baseline, growth falls to zero in 2007 (baseline thereafter). - Result: Net debt ratio would jump by almost 12 percentage points in 2007, before gradually declining as variables return to baseline. - C3. Domestic policy complacency (starting in 2007): - Assumptions: Primary surplus cut to 3 percent of GNP starting in 2007; structural reforms halted, including an immediate halt of privatization; real interest rates increase permanently; growth falls to a lower trend. - Result: Debt dynamics become explosive, raising the debt ratio to over 65 percent by 2012. - Bound tests and other stress outcomes (selected results from Table II.1, percent of GNP): - B1 (Real interest rate at historical average plus two standard deviations in 2007 and 2008): public net debt rises to 55.0 (2007) and 68.8 (2008) and remains elevated in following years. - B2 (Real GDP growth at historical average minus two standard deviations in 2007 and 2008): public net debt rises to 48.2 (2007) and 52.4 (2008). - B3 (Primary balance at historical average minus two standard deviations in 2007 and 2008): public net debt rises to 50.1 (2007) and 55.2 (2008). - B5 (One-time 30 percent real depreciation in 2007): public net debt path shows variation but does not generate explosive dynamics in that shock alone. - Tailored test outcomes (C-series) — selected values: - C1 (Deterioration in global environment): net debt reaches 47.2 (2007) and 47.0 (2008). - C2 (Turkey-specific shift in investor sentiment): net debt reaches 56.4 (2007) and 55.3 (2008). - C3 (Domestic policy complacency starting in 2007): net debt reaches 47.0 (2007), 50.2 (2008), 53.7 (2009), 57.4 (2010), 62.1 (2011), and 65.3 (2012). ### Policy implications emphasized in the text - Maintaining fiscal discipline and high primary surpluses is essential to prevent explosive debt dynamics in the face of shocks. - Continued accumulation of reserves by the central bank is assumed to strengthen coverage of short-term liabilities, but this may be financed in part by external debt. - Abandoning structural reforms or privatization and cutting primary surpluses materially increases vulnerability and can set public debt on an unsustainable path. - Further debt reduction, including fiscal savings, would strengthen Turkey’s sovereign risk profile; for example, fiscal savings of 2 percent of GNP over five years could materially improve the external debt profile and credit spreads (as noted in the Box on Turkey’s Sovereign Risk Profile). *Source: International Monetary Fund staff report material (Turkey: External Debt and Public Debt Sustainability Frameworks, 2002–2012; Staff Report for the 2007 Article IV Consultation — Informational Annex).* ### 1. Data provision to the Fund is broadly adequate for surveillance and program ### 1. Data provision to the Fund is broadly adequate for surveillance and program monitoring purposes, despite certain shortcomings. Turkey subscribes to the Special Data Dissemination Standard (SDDS). ### Real sector statistics - Frequency and timeliness: - Producer and consumer prices: published monthly, with a very short lag. - Industrial production: monthly data published with a lag of five to six weeks. - Quarterly national accounts: published with a 2-3 month lag. - National accounts publication and methodology: - Turkstat publishes national accounts in current and constant prices for the production and expenditure approaches to gross domestic product (GDP) and in current prices for the income approach. - In SDDS metadata, Turkstat indicates that GDP estimated using the production approach is the principal measure of GDP. - The national accounts are compiled in accordance with the 1968 System of National Accounts (1968 SNA) methodology. - Identified shortcomings in national accounts: - Outdated base year: 1987. - Use of value-added ratios that have been maintained constant for several industries since the last benchmark year (1990). - Annual surveys are not timely and not used as an input for the GDP estimates. - Use of single―instead of double―deflation to estimate GDP by production at constant prices. - Reform project and planned improvements (to align to 1993 SNA and implement Data ROSC recommendations): - Introduction of annual industrial survey results to the GDP data. - Improved estimation and deflation of output and household consumption. - Disaggregated deflation of trade in services and inclusion of shuttle trade in exports of goods. - Improvement in the estimation of selected aggregates. - Labor market statistics: - Biannual Household Labor Force Survey (HLFS) was replaced with a monthly survey at the beginning of 2000. - These new data are published quarterly with a three month lag. - Coverage of wage developments in the private sector has improved significantly through the use of quarterly surveys of the manufacturing sector. ### Government finance statistics - Budgetary data: - Published monthly, with a lag of some 2−3 weeks. - Coverage of the budget is incomplete due to sizable fiscal operations conducted through extra budgetary funds, for which data are available only with long lags. - Complications and omissions: - Omission of certain transactions from the fiscal accounts. - Failure to account for sizable quasi-fiscal operations carried out by state banks and state economic enterprises (SEEs). - Technical problems associated with consolidating the cash-based accounts of governmental entities with the accrual-based accounting of SEEs. - Difficulty reconciling fiscal data with monetary and BOP data, especially in the accounting of external debt flows and central government deposits. - Ongoing improvements under the IBRD-financed Public Financial Management Project (PFMP): - Adoption of an improved budget coding system. - Adoption of a chart of accounts. - Creation of a new debt management database. - Reporting to international publications: - Turkey reports fiscal data for publication in Government Finance Statistics Yearbook; the latest data available are for 2001 and cover the central government budgetary sector (including annex budget units). - Data are not provided for extrabudgetary and social security units. - No monthly and quarterly data are being reported for publication in International Financial Statistics. ### Monetary and financial statistics - Frequency and timeliness: - Central bank balance sheet and provisional data on the main monetary aggregates and total domestic credit: published weekly, with a one- and two-week lag, respectively. - Monetary survey and deposit interest rates: published monthly, with about a two-to-three-month lag. - Banking sector analytical accounts: - The CBT does not expect to meet the SDDS timeliness requirement for the analytical accounts of the banking sector in the short term due to delays in the preparation of year-end bank balance sheets and ongoing restructuring in the banking system. - The CBT reports monthly data to STA with about a three-to-four-month lag. - Differences in monetary authorities’ net foreign assets reporting: - STA and EUR use different measures, reflecting in part UFR treatment of central bank foreign currency-denominated liabilities to resident banks as foreign liabilities of the central bank. - Differences also stem from the use of program exchange rates in EUR’s presentation, while market exchange rates are used in IFS. ### External sector statistics - In line with SDDS prescriptions Turkey disseminates: - monthly balance of payments (BOP) statistics with a 2−3 month lag; - weekly international reserves with a one-week lag; - monthly data on the template on international reserves and foreign currency liquidity (reserve template) within one month after the reference period; - monthly merchandise trade data with one to two months lag; - quarterly external debt with one quarter lag; and, - annual international investment position (IIP) data with a six months lag. *Source: _cr07362 - 1. Data provision to the Fund is broadly adequate for surveillance and program monitoring purposes, despite certain shortcomings.* ### 10. The central bank reports quarterly BOP data to STA with about four months lag. ### 10. The central bank reports quarterly BOP data to STA with about four months lag. ### Balance of payments and IIP reporting practices - Balance of payments and IIP statistics are compiled in broad conformity with the conceptual framework of the fifth edition of the Balance of Payments Manual (BPM5). - The CBT periodically reviews the bank’s foreign exchange records to redress, to the extent possible, problems of coverage and misclassification using supplemental data sources and estimation techniques. - The central bank reports quarterly BOP data to STA with about four months lag. ### Data dissemination and frequencies (selected items, as of May 3, 2007) - Exchange Rates: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data D and M; Frequency of Reporting D and M; Frequency of Publication W and M. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data W; Frequency of Reporting W; Frequency of Publication W. - Reserve/Base Money: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data W and M; Frequency of Reporting W and M; Frequency of Publication W and M. - Broad Money: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data W and M; Frequency of Reporting W and M; Frequency of Publication W and M. - Central Bank Balance Sheet: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data W and M; Frequency of Reporting W and M; Frequency of Publication W and M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data W and M; Frequency of Reporting W and M; Frequency of Publication W and M. - Interest Rates: Date of latest observation 05/03/07; Date received 05/03/07; Frequency of Data D and M; Frequency of Reporting D and M; Frequency of Publication W and M. - Consumer Price Index: Date of latest observation April 2007; Date received 05/03/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation March 2007; Date received 04/12/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - External Current Account Balance: Date of latest observation February 2007; Date received 04/03/07; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - GDP/GNP: Date of latest observation 2006 Q4; Date received 04/02/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross External Debt: Date of latest observation 2006 Q4; Date received 03/30/07; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. ### Data quality assessments (from data ROSC and assessments referenced) - Methodological soundness and accuracy/reliability assessments follow the data ROSC (published March 14, 2002) and subsequent notes: - Observance codes include O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed), and NA (not available). - Selected entries in the table show methodological soundness and accuracy/reliability ratings, for example: - Broad Money: Methodological soundness O, O, LO, LO; Accuracy and reliability O, O, O, O, O. - Consumer Price Index: Methodological soundness O, O, O, O; Accuracy and reliability LO, O, O, O, NA. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Methodological soundness LO, LNO, O, O; Accuracy and reliability LO, O, O, O, NA. - External Current Account Balance: Methodological soundness O, O, LO, LO; Accuracy and reliability O, O, O, O, O. - GDP/GNP: Methodological soundness LO, LO, O, O; Accuracy and reliability LO, LO, O, LO, NA. ### IMF Fund relations and payments (selected financial figures) - Membership: Turkey became a member of the Fund on March 11, 1947; accepted obligations of Article VIII, Sections 2, 3, and 4 as of March 22, 1990. - Quota: 1,191.30 (Millions of SDRs) — Percent of Quota 100.00. - Fund holdings of currency: 6,702.55 (Millions of SDRs) — Percent of Quota 562.62. - Reserve position in Fund: 112.78 (Millions of SDRs) — Percent of Quota 9.47. - SDR Department net cumulative allocation: 112.31 (Millions of SDRs) — Percent of Allocation 100.00. - SDR Department holdings: 14.24 (Millions of SDRs) — Percent of Allocation 12.68. - Outstanding Purchases and Loans — Stand-By Arrangements: 5,624.02 (Millions of SDRs) — Percent of Quota 472.09. - Latest Stand-By Arrangement (approval 05/11/05, expiration 05/10/08): Amount Approved 6,662.04 (Millions of SDRs); Amount Drawn 3,664.12 (Millions of SDRs). - Projected Payments to Fund (Expectations Basis, in millions of SDRs): - Forthcoming 2007: Principal 1,843.54; Charges/Interest 234.33; Total 2,077.88. - 2008: Principal 1,244.05; Charges/Interest 200.07; Total 1,444.12. - 2009: Principal 1,693.27; Charges/Interest 111.75; Total 1,805.02. - 2010: Principal 843.16; Charges/Interest 32.84; Total 876.00. - 2011: Principal (blank in table); Charges/Interest 4.76; Total 4.76. - Projected Payments to Fund (Obligations Basis, in millions of SDRs): - 2007: Principal 1,130.63; Charges/Interest 247.67; Total 1,378.29. - 2008: Principal 712.92; Charges/Interest 266.67; Total 979.59. - 2009: Principal 1,244.05; Charges/Interest 199.55; Total 1,443.60. - 2010: Principal 1,693.27; Charges/Interest 112.06; Total 1,805.33. - 2011: Principal 843.16; Charges/Interest 32.95; Total 876.11. ### Executive Board assessment — key findings and policy recommendations - Key findings: - Turkey achieved average annual growth of 7½ percent since 2002, driven by private consumption and investment, declining real interest rates, surging capital inflows, rapid credit expansion, and rising productivity. - Inflation has dropped dramatically over the past five years, but remains above target; inflation inertia and supply shocks persist. - Public debt ratios have declined considerably and debt composition has improved; bank balance sheets have become more robust. - New vulnerabilities arise from dependence on large capital inflows, lira appreciation, and a widening current account deficit. - Policy recommendations and endorsements by Directors: - Maintain fiscal and monetary discipline and preserve the floating exchange rate as a shock absorber. - Continue building buffers in balance sheets and improve financing structures; support authorities’ plan to increase gradually and predictably the level of international reserves. - Sustain tight fiscal policy—possibly underpinned by a fiscal rule—to reduce debt, support disinflation, and buttress market confidence. - Exercise tight control over current spending to facilitate easing the heavy tax burden, especially on labor and financial transactions. - Adopt revised social security legislation that preserves the savings targeted in the 2006 reform law as soon as possible. - Improve social services efficiency and rationalize civil service pay. - Continue reforms to improve tax collection, reduce fragmentation in tax administration, and make the large taxpayer unit fully effective. - Endorse the central bank’s tight monetary stance and defer interest rate cuts until inflation is firmly on a path toward the 4 percent target; preserve central bank independence. - Deepen financial intermediation while preserving financial system soundness: step up supervisory oversight, tighten provisioning requirements further, and improve timeliness of corporate balance sheet data. - Remove impediments to employment creation and labor productivity growth; ease labor regulation and consider reductions in labor taxes provided they do not compromise debt reduction. - Advance the privatization program and restructure the energy sector, including privatizing electricity distribution companies and allowing better cost-recovery pricing. ### Selected economic indicators and performance (2001–07, selected figures) - Real GNP growth rate: 2001 -9.5; 2002 7.9; 2003 5.9; 2004 9.9; 2005 7.6; 2006 6.0; 2007 5.0 (Est./Proj. as shown). - CPI inflation (12-month; end-of period): 2001 68.5; 2002 29.7; 2003 18.4; 2004 9.4; 2005 7.7; 2006 9.7; 2007 6.0. - Central government primary balance (Percent of GNP): 2001 4.8; 2002 3.5; 2003 4.9; 2004 5.3; 2005 5.5; 2006 5.8; 2007 5.2. - Consolidated public sector primary balance (Percent of GNP): 2001 5.5; 2002 5.1; 2003 6.2; 2004 7.2; 2005 6.8; 2006 6.6; 2007 6.7. - Net debt of public sector (Percent of GNP): 2001 90.4; 2002 78.4; 2003 70.3; 2004 64.0; 2005 55.3; 2006 44.8; 2007 40.9. - Current account balance (Percent of GNP): 2001 2.4; 2002 -0.8; 2003 -3.4; 2004 -5.2; 2005 -6.3; 2006 -7.9; 2007 -7.3. - Exports of goods and non-factor services (Percent of GNP): 2001 36.1; 2002 31.0; 2003 30.1; 2004 30.5; 2005 29.3; 2006 29.7; 2007 30.3. - Imports of goods and non-factor services (Percent of GNP): 2001 31.7; 2002 30.1; 2003 31.3; 2004 33.8; 2005 34.0; 2006 35.9; 2007 35.7. - Trade balance (Percent of GNP): 2001 -2.6; 2002 -4.0; 2003 -5.9; 2004 -7.9; 2005 -9.3; 2006 -10.0; 2007 -9.3. - Gross external debt (Percent of GNP): 2001 93.1; 2002 77.3; 2003 56.4; 2004 50.1; 2005 46.7; 2006 50.5; 2007 52.8. - Foreign direct investment (net, Percent of GNP): 2001 1.9; 2002 0.5; 2003 0.5; 2004 0.7; 2005 2.4; 2006 4.8; 2007 3.5. - Nominal growth of M2Y broad money (percent): 2001 87.5; 2002 25.4; 2003 13.0; 2004 22.1; 2005 24.5; 2006 24.1; 2007 14.9. - Per capita GDP (2006): $5,534. - Poverty Rate (2003): 26 percent (WB poverty line estimate). ### Recent technical assistance and institutional notes - Recent technical assistance missions include: - MFD Mar. 04 — Currency reform. - STA Apr. 04 — Consumer and wholesale price indices. - STA May. 04, Jun. 05 and Sept. 06 — National accounts statistics. - FAD May. 04 — Public expenditure analysis. - FAD Jun. 04 — Tax reform strategy. - MFD Oct. 04 — Currency reform. - FAD/MFD Feb. 05 — Treasury cash management and state bank reform. - MFD 2005-06 (several missions) — Inflation targeting and monetary policy implementation. - ICM May. 05 — Investor relations office. - FAD Jul. 05 — Income tax reform. - FAD Aug. and Sept. 05; Apr. and Aug. 06 — Tax and social security administration reforms. - FAD Feb. 07 — Health spending. - FAD Mar. 07 — Revenue administration reforms. - Safeguard assessment: A new assessment of the CBT’s safeguards framework was completed on June 29, 2005; it uncovered no material weaknesses and recommended actions on internal audit and controls, which have been implemented. - Exchange rate arrangement: Since February 22, 2001, the lira has been under an independent floating exchange rate regime. *IMF staff report content as provided in the source document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07362.pdf_