Turkey: How To Boost Growth Without Increasing Imbalances
IMF Blog, January 14, 2014
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- Authors: Isabel Rial, Suchanan Tambunlertchai, Alexander Tieman
- Published: January 14, 2014
Current account deficits
- Turkey has experienced strong growth over the last decade alongside a steady widening of the current account deficit.
- The current account deficit was projected to come out at 7.4 percent of GDP in 2013.
- The counterpart of this deficit is a reliance on external financing, much of which is of a short-term nature, highlighting the Turkish economy’s main problem.
The external deficit as a speed limit to growth
- Regression analysis in the IMF annual review suggests the level of growth consistent with a stable current account is in the 2¾ - 3½ percent range.
- Growth above this speed limit would lead to a wider current account deficit.
- Without policies to reduce the external deficit, growth of 4 to 5 percent per year is unlikely to be sustainable.
How this speed limit can change
- Raising domestic savings—both public and private—would lower Turkey’s dependence on external financing and hence its current account deficit.
- Policies should aim to improve competitiveness further through structural change.
- Monetary policy should tackle persistently above-target inflation that chips away at Turkey’s competitiveness through real exchange rate appreciation.
- These reforms will take considerable time to bear fruit.
- Meanwhile, maintaining flexibility in the budget will be important to cushion the volatile economy by enabling officials to adjust spending and taxation to the economic cycle.
Policy recommendations to enable faster growth
- Domestic savings:
- Recent reforms of the private pension system have increased participation and pension savings.
- Officials could follow up by providing more incentives for pension savings.
- More ambitious public savings targets in the over the next few years, akin to achievements before the global financial crisis, could also contribute.
- Competitiveness:
- Structural policies should aim to improve the competitiveness of domestic goods relative to imports and move exports up the value chain.
- Strong growth in Turkey’s export volume over the past decade has not made up for its high import needs.
- Growth in export value has started to lag behind the growth in export volume.
- The government should focus policies on encouraging investments in higher-value-added export sectors, such as chemicals, pharmaceuticals, machinery, and equipment.
- Moving towards higher-technology activities will help maintain competitiveness as wage levels in Turkey continue to rise.
- Bottlenecks in skills and education, and in innovation and research and development, have impeded progress.
- Flexible budget:
- Keeping the budget flexible will lock in past fiscal gains by creating room to adapt spending and taxation as economic circumstances change, and secure a higher and more stable public contribution to national savings.
- Turkey’s fiscal effort in the last ten years has brought about an impressive reduction in debt and interest costs.
- The fiscal space created has allowed the government to boost social spending, leading to a strong improvement in social indicators.
- In recent years the share of non-discretionary primary spending—such as compensation to employees and transfers to social security—has grown rapidly.
- Revenues are strongly dependent on output growth, and the loss of flexibility in primary expenditure has become a source of concern.
- Growing primary expenditure rigidities could undermine fiscal discipline.
- Officials have systematically exceeded spending ceilings set in the medium-term fiscal plan, exposing weaknesses in public financial management practices.
Policies for a flexible budget
- To preserve a flexible budget, Turkey should restrain spending growth and improve existing budgetary procedures.
- Five main policy options are highlighted:
- Contain the public employment growth rate.
- Introduce more flexible public wage indexation mechanisms.
- Renew efforts to reform the pension system.
- Save over-performance in revenues.
- Undertake a gradual move to a more binding spending ceiling framework, including a mechanism to adjust for past deviations.
- A combination of these policies would help the government maintain budget flexibility and preserve the fiscal gains achieved over the past decade.
Isabel Rial, Suchanan Tambunlertchai, Alexander F. Tieman — January 14, 2014
Content in this bundle
- Türkiye: Dengesizlikleri Artırmadan Büyümeyi Canlandırma
- Country Report
- Country Report
