IMF Executive Board Concludes 2017 Article IV Consultation with Turkey

IMF News, February 3, 2017

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Published: February 3, 2017

Economic performance and outlook

Growth slowed after a strong performance in 2015; growth remains consumption-driven while investment is weak amid heightened uncertainty and a sharp deceleration of credit growth.
The July failed coup attempt heightened political uncertainty; Russian sanctions negatively affected confidence; decline in tourism offsets savings from low energy prices.
Inflation has moderated but is still well above target.
Growth is projected to be below potential in 2016–17.
Fiscal stimulus and the expected completion of the gradual lifting of Russian sanctions are expected to support growth.
Over the medium-term, growth is projected to firm around 3.5 percent.
Inflation is expected to stay above target and the current account deficit to remain sizeable.

Fiscal policy

Fiscal policy turned expansionary in 2016.
Higher government spending driven by:
- increase in the minimum wage and related subsidies,
- hiring in the education and health sectors,
- higher security outlays.
Government measures in second half of 2016 included temporary tax reductions/exemptions and expanded investment incentives to revive growth.
Most Directors supported a near‑term moderate fiscal expansion given current fiscal space.
Directors advised a tighter fiscal stance in the medium term to reduce external imbalances and lower inflation.
Directors encouraged strengthening the fiscal risk management framework given increasing contingent liabilities, in particular due to continued expansion in infrastructure‑related PPPs.

Monetary policy and financial sector

The central bank of Turkey (CBRT) eased monetary conditions by cutting the overnight lending rate by 250 basis points while narrowing the interest rate corridor between March and September 2016.
After a sharp depreciation of the Lira in November, the CBRT raised the repo rate to 8 percent and partly withdrew liquidity provided to banks after the failed coup attempt.
Bank capital levels remain high, although some buffers are decreasing; higher profits boosted capital adequacy, reflecting in part lower overnight borrowing costs and relaxation of prudential norms.
Non‑performing loans are increasing from a low level that partly reflects accommodating rules for loan restructuring.
Credit growth slowed markedly in 2016 due to both demand and supply factors.
Directors welcomed steps to simplify the monetary policy framework and recommended remaining vigilant and tightening monetary policy to address sharp lira depreciation, contain high and rising inflation, and counteract intensifying external pressures.
Directors recommended rebuilding international reserve buffers as conditions permit.
Directors encouraged continued vigilance in the banking sector in light of deteriorating asset quality, called for further strengthening of supervision and bank governance, and recommended strengthening macroprudential policy focusing on foreign exchange and other systemic risks (and not using macroprudential policy for demand management).
Directors welcomed FSAP findings and recommended further strengthening the independence of financial sector supervisory authorities, deepening and broadening the risk assessment nature of financial supervision and follow up, and strengthening the role of the Financial Stability Committee.

Structural reforms and labor market

Progress on structural reforms has been slow.
Directors encouraged intensifying the pace of structural reforms to promote economic rebalancing and boost productivity.
Directors welcomed progress made to reform the voluntary pension system and urged continued efforts to increase domestic saving.
Directors underscored importance of improving the investment climate and labor market competitiveness.
Directors commended the authorities for hosting a large number of refugees and for efforts to integrate them into the labor market, while stressing the importance of continued international assistance.

Executive Board assessment — key priorities

Rebalance the economy through policies aimed at increasing domestic savings and raising potential growth, while ensuring strong and credible public institutions and policy frameworks clearly communicated.
Use near‑term moderate fiscal expansion to address cyclical developments, but adopt a tighter fiscal stance in the medium term.
Strengthen fiscal risk management given rising contingent liabilities from infrastructure‑related PPPs.
Maintain vigilance in monetary policy; tighten policy as needed to address depreciation and inflation, and rebuild reserves when possible.
Strengthen financial sector supervision, bank governance, and macroprudential frameworks; enhance FSAP recommendations implementation.

Turkey: Selected Economic Indicators, 2014−21

Population (2015): 78.2 million
Per capita GDP (2015): US$9,182
Quota (2015): SDR 1,455.8 million

Real sector (Percent)

Real GDP growth rate: 2014: 3.0; 2015: 4.0; 2016: 2.7; 2017 Proj.: 2.9; 2018 Proj.: 3.3; 2019 Proj.: 3.6; 2020 Proj.: 3.9
Contributions to real GDP growth — Private domestic demand: 2014: 0.9; 2015: 3.2; 2016: 2.5; 2017 Proj.: 1.5; 2018 Proj.: 2.8; 2019 Proj.: 3.4
Contributions to real GDP growth — Public spending: 2014: 0.1; 2015: 1.1; 2016: 1.8; 2017 Proj.: 0.6; 2018 Proj.: 0.4
Contributions to real GDP growth — Net exports: 2014: 2.0; 2015: -0.3; 2016: -1.6; 2017 Proj.: 0.7; 2018 Proj.: 0.2; 2019 Proj.: -0.2
GDP deflator growth rate: 2014: 8.3; 2015: 7.4; 2016: 7.5; 2017 Proj.: 7.3; 2018 Proj.: 7.0
Nominal GDP growth rate: 2014: 11.5; 2015: 11.7; 2016: 10.2; 2017 Proj.: 10.5; 2018 Proj.: 10.9; 2019 Proj.: 11.4; 2020 Proj.: 11.6; 2021 Proj.: 11.2
CPI inflation (12-month; period-average): 2014: 8.9; 2015: 7.7; 2016: 8.0; 2017 Proj.: 7.9
Unemployment rate: 2014: 9.9; 2015: 10.3; 2016: 11.0; 2017 Proj.: 10.0; 2018 Proj.: 10.1

Nonfinancial public sector (Percent of GDP)

Primary balance: 2014: -0.6; 2015: -1.3; 2016: -0.7; 2017 Proj.: 0.5; 2018 Proj.: 0.8
Net interest payments: 2014: 2.2; 2015: 2.1
Overall balance: 2014: -1.5; 2015: -2.6; 2016: -3.4; 2017 Proj.: -2.5; 2018 Proj.: -1.0; 2019 Proj.: -0.9
Debt of the public sector — General government gross debt (EU definition): 2014: 33.5; 2015: 32.9; 2016: 34.6; 2017 Proj.: 35.8; 2018 Proj.: 36.6; 2019 Proj.: 35.2; 2020 Proj.: 34.8

External sector (Percent of GDP)

Current account balance: 2014: -5.5; 2015: -4.5; 2016: -5.3; 2017 Proj.: -5.0; 2018 Proj.: -4.7
o/w Nonfuel current account balance: 2014: -1.4; 2015: -0.8; 2016: -1.1
Gross financing requirement: 2014: 26.5; 2015: 27.9; 2016: 27.2; 2017 Proj.: 30.7; 2018 Proj.: 31.5; 2019 Proj.: 30.9; 2020 Proj.: 29.6; 2021 Proj.: 29.2
Foreign direct investment (net): 2014: 1.7; 2015: 1.2; 2016: 1.3; 2017 Proj.: 1.4; 2018 Proj.: 1.6
Gross external debt 1/: 2014: 50.4; 2015: 55.4; 2016: 59.6; 2017 Proj.: 67.1; 2018 Proj.: 67.8; 2019 Proj.: 66.6; 2020 Proj.: 64.9; 2021 Proj.: 63.5
Net external debt: 2014: 30.8; 2015: 35.7; 2016: 38.7; 2017 Proj.: 44.6; 2018 Proj.: 45.9; 2019 Proj.: 45.8; 2020 Proj.: 45.1
Short-term external debt (by remaining maturity): 2014: 21.0; 2015: 22.6; 2016: 23.8; 2017 Proj.: 27.1; 2018 Proj.: 27.4; 2019 Proj.: 26.6; 2020 Proj.: 25.7; 2021 Proj.: 24.4

Monetary conditions

Average real policy rate 2/: 2014: -0.1; 2015: …
Nominal growth of broad money (percent): 2014: 11.9; 2015: 17.1; 2016: 11.1

Press Release No. 17/34. February 3, 2017. International Monetary Fund.