On January 18, 2023, the IMF Executive Board Concluded the 2022 Article IV Consultation with the Republic of Türkiye
IMF News, August 18, 2023
Source details
- Canonical URL
- On January 18, 2023, the IMF Executive Board Concluded the 2022 Article IV Consultation with the Republic of Türkiye
Other formats
Bibliographic details
- Published: August 18, 2023
Economic developments and recent drivers
- Türkiye made “impressive economic gains over the past two decades,” including income catch-up, poverty reduction, and marked disinflation; nearly 30 percent of the population was lifted out of poverty.
- In recent years, reforms waned, productivity gains slowed, and growth became increasingly dependent on externally-funded credit and demand stimulus.
- The newly-adopted “Türkiye Economic Model” (low interest rates plus regulatory measures to direct credit to selected sectors and promote greater use of the lira) has exacerbated vulnerabilities.
- Driven by lagged effects of an outsized credit impulse in 2020, relaxation of mobility restrictions, and robust external demand:
- Output rebounded by more than 11 percent in 2021.
- Robust growth carried into the first half of 2022.
- GDP is now significantly above its pre-pandemic trend.
- Rates of unemployment and labor force participation have more than fully recovered.
Monetary dynamics, inflation, and exchange rate pressures
- Despite strong growth and inflation four times above target, policy rates were cut aggressively in late 2021, causing significant pressure on the lira.
- Pressure was relieved only through large foreign exchange intervention and the introduction of an FX-protected deposit scheme.
- Inflation developments:
- Inflation accelerated sharply, reaching a 24-year high of 85 percent in October (among the highest in large EMs).
- Inflation (period-average) and (end-year) projections are reported in Table 1 (see Key statistics).
- The authorities adopted an increasingly distortionary and complex set of macrofinancial measures to encourage holding of lira assets.
External sector and reserves
- External imbalances widened, aggravated by the war in Ukraine.
- Reserve buffers remain low, despite increasing somewhat in recent months.
- External risks include: larger- or faster-than-expected tightening by advanced market central banks, escalating geopolitical tensions, higher commodity prices, higher global risk aversion, and weaker global growth.
Financial stability (FSSA findings)
- The Financial System Stability Assessment (FSSA) found financial stability risks are high and growing.
- Key financial risks and vulnerabilities:
- FX liquidity risks have risen due to a tightening bank–central bank nexus and scarce readily available central bank FX reserves.
- Banks could face capital adequacy pressure should rapid credit growth resume.
- Uncertainty remains over banks’ asset quality and capital adequacy.
- The macrofinancial policy mix has introduced distortions in financial price formation; some measures work at cross purposes or diverge from international standards.
- Operational autonomy has been eroded in key agencies; banking supervisory practices and the regulatory framework require critical enhancement.
- Several gaps in the crisis management framework identified in the last FSAP remain.
Executive Board assessment
- Directors commended Türkiye’s remarkable recovery from the pandemic and the contribution of stimulative policies and a dynamic private sector.
- Directors noted that policies that buoyed growth also exacerbated vulnerabilities; policy rate cuts in late 2021 led to significant pressure on the lira and did not address root causes.
- With high inflation at risk of becoming entrenched, Directors stressed:
- Prompt and sizable interest rate hikes are needed.
- Steps to strengthen central bank independence.
- Carefully phasing out regulatory measures, allowing the policy interest rate to act as the primary monetary policy instrument.
- Replenishing international reserves as conditions allow.
- Fiscal assessment:
- Public debt burden remains low; Directors commended commitment to fiscal discipline.
- Directors cautioned against rising fiscal risks from growing spending pressures and contingent liabilities, including from FX-protected schemes.
- Recommendation: maintain a tight fiscal stance to preserve buffers and contain domestic demand, while focusing on targeted measures to support the most vulnerable.
- Encouraged further steps to increase transparency and strengthen debt management.
- Financial sector recommendations:
- Phase out regulatory measures to minimize distortions to price formation and capital allocation and reduce the state’s role in credit provision.
- Strengthen prudential standards and reverse regulatory forbearance to improve asset quality and capital adequacy transparency.
- Integrate crypto assets into the supervisory framework and fully implement FATF action plans.
- Increase attention to FX liquidity monitoring and contingency planning; strengthen banking supervision by adequately resourcing supervision activities.
- Reform the emergency liquidity assistance framework and strengthen the crisis management framework.
- Structural reforms:
- Directors called for targeted structural reforms to foster stronger sustainable growth and increase resilience.
- Welcomed consultation focus on female labor force participation and climate change.
- Recommended improving the business and regulatory environment, labor market flexibility, and the quality of human capital, and closing labor market gender gaps.
- A comprehensive strategy would help meet Türkiye’s climate goals.
Outlook and risks (staff projections and narrative)
- Growth outlook:
- Growth is expected to decline to 3 percent in 2023 from about 5.5 percent in 2022.
- Near-term growth may surprise on the upside if unexpected external financing allows continuation of pro-growth policies and a wider current account deficit, but overall risks are skewed to the downside.
- Inflation outlook:
- Inflation is expected to fall to about 70 percent by end-2022, and to fall further, to 36 percent, by end-2023.
- Drivers of disinflation: fading exchange rate passthrough, favorable base effects, and expected lower commodity price pressures.
- Inflation is expected to remain much higher than the target and than in peer countries due to loose policies, inflation inertia, and un-anchored inflation expectations.
- Risks of policy continuation:
- Doubling down on pro-growth policies without sufficient external financing could weigh on confidence, fuel pressures on the lira, hurt bank and corporate balance sheets, and create spillovers to the public sector.
Key statistics (selected from Table 1: Türkiye: Selected Economic Indicators, 2021–27)
- Population (2021): 84.7 million
- Per capita GDP (2021): US$9,654
- Quota: SDR 4,658.6 million
- Real GDP growth rate:
- 2021: 11.4
- 2022: 5.5
- 2023 (Proj.): 3.0
- Contributions to real GDP growth (selected, percent):
- Private consumption: 2021: 8.7; 2022: 8.4; 2023 (Proj.): 2.0
- Public consumption: 2021: 0.4; 2022: 1.6; 2023 (Proj.): 0.5
- Investment (incl. inventories): 2021: -4.1; 2022: -4.8; 2023 (Proj.): 0.9
- Net exports: 2021: 6.4; 2022: 1.5; 2023 (Proj.): -1.4
- Output gap:
- 2021: 2.2; 2022: 1.7; 2023 (Proj.): 1.2; 2024 (Proj.): 0.0
- GDP deflator growth rate:
- 2021: 29.0; 2022: 83.3; 2023 (Proj.): 51.7; 2024 (Proj.): 24.1; 2025 (Proj.): 19.3; 2026 (Proj.): 18.5; 2027 (Proj.): 18.2
- Inflation (period-average):
- 2021: 19.6; 2022: 72.1; 2023 (Proj.): 50.6; 2024 (Proj.): 24.0; 2025 (Proj.): 20.2; 2026 (Proj.): 20.0
- Inflation (end-year):
- 2021: 36.1; 2022: 70.0; 2023 (Proj.): 36.0; 2024 (Proj.): 21.3
- Unemployment rate:
- 2021: 12.0; 2022: 10.8; 2023 (Proj.): 10.5
- Fiscal sector (percent of GDP):
- Nonfinancial public sector overall balance: 2021: -2.5; 2022: -4.4; 2023 (Proj.): -5.3; 2024 (Proj.): -5.0; 2025 (Proj.): -4.9
- General government overall balance (headline) 1/: 2021: -2.6; 2022: -3.9; 2023 (Proj.): -4.7; 2024 (Proj.): -4.5; 2025 (Proj.): -4.6
- General government gross debt (EU definition): 2021: 41.8; 2022: 35.6; 2023 (Proj.): 35.4; 2024 (Proj.): 36.6; 2025 (Proj.): 38.4; 2026 (Proj.): 39.8; 2027 (Proj.): 39.6
- External sector:
- Current account balance: 2021: -0.9; 2022: -6.0; 2023 (Proj.): -3.4; 2024 (Proj.): -2.2
- Gross external debt: 2021: 54.8; 2022: 57.8; 2023 (Proj.): 48.6; 2024 (Proj.): 47.7; 2025 (Proj.): 46.9; 2026 (Proj.): 46.1; 2027 (Proj.): 45.6
- Gross financing requirement: 2021: 21.2; 2022: 26.2; 2023 (Proj.): 24.7; 2024 (Proj.): 23.4; 2025 (Proj.): 23.2; 2026 (Proj.): 23.3
Source: IMF press release, “On January 18, 2023, the IMF Executive Board Concluded the 2022 Article IV Consultation with the Republic of Türkiye.”