IMF Survey: Turkey: Taking Growth to Next Level
IMF News, July 27, 2007
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- Authors: Kevin Fletcher IMF European Department July
- Published: July 27, 2007
Remarkable Recovery and Current Challenges
- Economic growth has averaged 7½ percent since the 2001 crisis.
- Inflation has fallen from 70 percent to just below 10 percent.
- The net public debt ratio has been cut in half.
- Banking system indicators have improved markedly.
- External imbalances and vulnerabilities:
- Capital inflows have surged, contributing to a stronger real exchange rate.
- The current account deficit widened to 8 percent of GNP in 2006.
- Dependence on capital inflows exposes Turkey to sudden reversals of investor sentiment.
- The output gap that opened during the 2001 crisis has nearly closed, making sustained 7-8 percent growth harder.
- Slowing disinflation makes the final push to get inflation down to low single digits difficult.
Maintaining Discipline (Macroeconomic Framework)
- Fiscal policy:
- Since 2002, fiscal discipline has been anchored to a primary surplus target of 6½ percent of GNP.
- Near-term maintenance of a high primary surplus would:
- Further reduce debt.
- Lower real interest rates (which are still very high).
- Support a further drop in inflation.
- Help reduce the current account deficit.
- As debt falls over the medium term, Turkey may need a new fiscal anchor; an explicit fiscal rule (for example, a limit on spending growth) is suggested to allow easing of the heavy tax burden on labor and financial transactions.
- Further improvements in fiscal transparency and public financial management would support such a rule.
- Monetary policy and exchange rate:
- The central bank's near-term priority is to bring inflation down to the official target of 4 percent (Turkey adopted inflation targeting in early 2006).
- Achieving the target will require a continued tight policy stance.
- Keeping the floating exchange rate in place will help contain macroeconomic risks, facilitate adjustment to emerging imbalances, and encourage hedging against currency risks.
Boosting Growth (Structural Reform Priorities)
- General approach:
- Macroeconomic policies should be buttressed by microeconomic reforms to raise growth and ensure fiscal sustainability.
- Financial market development while containing risks:
- Turkey's relatively low levels of private credit (as a share of GNP) hold back investment and growth.
- Following implementation of a new mortgage framework, further financial intermediation gains could come from reducing financial transaction taxes and privatizing state-owned banks.
- Rapid credit growth creates banking system risks; containing these risks requires close supervision, adequate buffers in bank balance sheets, and improved disclosure of corporate financial statements.
- Labor market:
- Turkey has a tightly regulated labor market and high labor taxes.
- Easing labor regulation and taxes could:
- Create more jobs in the formal sector.
- Improve productivity.
- Boost foreign direct investment.
- Social security and pension reform:
- Turkey's mandatory pension systems offer the lowest retirement ages (60 for men and 58 for women) and the second-highest benefits relative to pre-retirement earnings in the Organization for Economic Cooperation and Development.
- As a result, pension systems run large deficits despite high social security contribution rates.
- Separate systems for different types of workers hinder mobility across sectors.
- Comprehensive pension reform is key and would include:
- Rationalizing benefits.
- Gradually raising retirement ages.
- Integrating the different pension systems.
- Expected benefits of pension reform:
- Securing long-run debt sustainability.
- Creating fiscal space to ease the heavy labor tax burden.
- Making the labor market operate more smoothly.
- Political economy:
- Some reforms will likely encounter resistance, but successful implementation would yield substantial benefits in terms of economic stability and higher living standards.
Source: IMF Survey by Kevin Fletcher, IMF European Department, July 27, 2007.