IMF Executive Board Concludes 2019 Article IV Consultation with Turkey
IMF News, December 27, 2019
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- Published: December 27, 2019
Macroeconomic developments and outlook
- Growth became increasingly dependent on externally-funded credit and demand stimulus after the global financial crisis, leading to an economy running above potential with a large current account deficit and high inflation.
- These imbalances left the economy susceptible to a change in market sentiment that triggered sizeable lira depreciation and a recession in late 2018.
- Growth resumed in 2019, driven by:
- Expansionary fiscal policy.
- Rapid credit provision by state-owned banks.
- More favorable external financing conditions.
- External adjustment:
- Import compression and a strong tourism season contributed to a remarkable current account adjustment.
- Inflation and monetary policy:
- Inflation peaked at around 25 percent in October 2018.
- The central bank cut policy rates by 1,000 basis points since July 2019.
- Subsequent drivers of inflation decline: strong base effects, relative lira stability, and a negative output gap.
- Inflation expectations remain well above target.
- External and balance-sheet vulnerabilities:
- Reserves are low and external financing needs high.
- Non-financial corporate and bank balance sheets stressed by lira depreciation, higher interest rates, and lower growth.
- Public debt is low but the fiscal deficit has increased; uncertainty over contingent liabilities and potential debt rollover pressures limit fiscal space.
Executive Board Assessment — key findings
- Directors noted that stimulus-driven growth in previous years contributed to large economic imbalances.
- The 2019 recovery is fragile; vulnerabilities include:
- Low reserve buffers.
- Large external financing needs.
- Stressed bank and corporate balance sheets.
- Directors emphasized the need for prudent policies and a comprehensive package of reforms to secure stronger and more resilient medium-term growth.
Fiscal policy assessment and recommendations
- Fiscal anchor:
- Fiscal discipline has been a longstanding policy anchor but has been gradually weakening.
- Central government primary balance recorded a deficit in 2018, the first time in almost a decade.
- Fiscal stimulus continued in the first half of 2019, contrary to consolidation planned in the late-2018 New Economy Program.
- Recommendations:
- Fiscal policy should remain a key policy anchor.
- Adopt a broadly neutral fiscal stance in 2020, combined with tight monetary and quasi‑fiscal policies.
- Undertake a modest consolidation over the medium term to keep public debt low and stable.
- Strengthen oversight and management of public-private partnerships (authorities' efforts welcomed).
Monetary policy and reserves
- Directors' view:
- Monetary policy should focus on durably lowering inflation to permanently lower interest rates.
- Recent monetary policy easing has gone too far.
- Need for clearer monetary and intervention policy to bolster transparency and central bank credibility.
- Recommendation to rebuild international reserves as conditions allow.
Banking sector, credit growth, and financial stability
- State-owned banks:
- State-owned banks have supported rapid credit growth, particularly from early-2019, while private banks cut back lending.
- Directors emphasized vigilance regarding state-owned banks' rapid credit expansion.
- Encouraged steps to rein in credit growth.
- Bank health and restructuring:
- Directors generally agreed on the need for a third‑party asset quality review and new stress tests to better understand bank health.
- Recommended reforms to improve the insolvency regime and out‑of‑court restructuring to release resources and restart productive lending.
- Objective: Clean up bank and corporate balance sheets to support financial stability and more resilient growth.
Structural reforms and medium-term growth
- Directors called for focused and carefully sequenced structural reforms to enhance medium‑term growth and resilience:
- Improve product market efficiency.
- Increase labor market flexibility.
- Improve the quality of human capital.
- Increase female labor force participation to facilitate resource reallocation to productive sectors.
- Governance reforms to improve the investment climate and economic efficiency.
- Directors commended Turkey for hosting a large number of refugees.
Key statistics (Table 1: Turkey: Selected Economic Indicators, 2017–24)
- Population (2018): 82 million
- Per capita GDP (2018): US$9,405
- Quota: SDR 4,658.6 million
- Real GDP growth rate:
- 2017: 7.5
- 2018: 2.8
- 2019: 0.2
- 2020: 3.0
- 2021: 3.5
- 2022: (not shown)
- 2023: (not shown)
- 2024: (Proj.)
- Contributions to real GDP growth (selected):
- Private consumption: 2017: 3.7; 2018: 0.0; 2019: -0.1; 2020: 2.6; 2021: 2.0; 2022: 1.9
- Public consumption: 2017: 0.7; 2018: 1.0; 2019: 0.1; 2020: 0.3; 2021: 0.5
- Investment (incl. inventories): 2017: 2.9; 2018: -2.4; 2019: -4.7; 2020: 2.2; 2021: 1.6; 2022: 1.3; 2023: 1.2
- Net exports: 2017: 4.2; 2018: 4.3; 2019: -1.8; 2020: -0.9; 2021: -0.5; 2022: -0.2
- Output gap:
- 2017: 1.5
- 2018: -1.1
- 2019: -0.8
- GDP deflator growth rate:
- 2017: 11.0
- 2018: 16.4
- 2019: 14.4
- 2020: 11.8
- 2021: 11.6
- 2022: 10.9
- 2023: 10.8
- Inflation (period-average):
- 2017: 11.1
- 2018: 16.3
- 2019: 15.7
- 2020: 12.6
- 2021: 12.4
- 2022: 11.4
- Inflation (end-year):
- 2017: 11.9
- 2018: 20.3
- 2019: 13.5
- 2020: 12.0
- Unemployment rate:
- 2017: 13.8
- 2018: 13.7
- 2019: 12.9
- 2020: 12.3
- Fiscal sector (Percent of GDP, unless otherwise noted):
- Nonfinancial public sector overall balance:
- 2017: -2.2
- 2018: -3.8
- 2019: -5.2
- 2020: -4.9
- 2021: -5.3
- General government overall balance (headline) 1/:
- 2017: -1.5
- 2018: -3.0
- 2019: -3.9
- 2020: -4.6
- 2021: -4.5
- General government gross debt (EU definition):
- 2017: 28.2
- 2018: 30.1
- 2019: 32.2
- 2020: 33.1
- 2021: 34.1
- 2022: 35.4
- 2023: 36.6
- 2024: 37.3
- External sector:
- Current account balance:
- 2017: -5.6
- 2018: -3.5
- 2019: -0.6
- 2020: -1.3
- 2021: -1.7
- Gross external debt:
- 2017: 53.4
- 2018: 57.6
- 2019: 61.3
- 2020: 55.7
- 2021: 50.7
- 2022: 47.7
- 2023: 46.0
- 2024: 44.2
- Gross financing requirement:
- 2017: 25.0
- 2018: 26.8
- 2019: 23.5
- 2020: 22.3
- 2021: 21.5
- 2022: 21.0
- 2023: 20.2
- Monetary conditions:
- Real average cost of CBRT funding to banks:
- 2017: 0.4
- 2018: 1.4
- 2019: …
- Growth of broad money (M2): 2017: 18.4
- Growth of credit to private sector: 2017: 14.1
IMF Executive Board Concludes 2019 Article IV Consultation with Turkey — Press Release No. 19/491 (December 27, 2019).
