## Turkey: How To Boost Growth Without Increasing Imbalances _IMF Blog, January 14, 2014_ ## Source details **Canonical URL:** [Turkey: How To Boost Growth Without Increasing Imbalances](https://www.imf.org/en/blogs/articles/2014/01/14/turkey-how-to-boost-growth-without-increasing-imbalances) ## Other formats - [Markdown version](/en/blogs/articles/2014/01/14/turkey-how-to-boost-growth-without-increasing-imbalances/index.md) - [Structured JSON version](/en/blogs/articles/2014/01/14/turkey-how-to-boost-growth-without-increasing-imbalances/index.json) - [Bundle manifest](/en/blogs/articles/2014/01/14/turkey-how-to-boost-growth-without-increasing-imbalances/bundle-manifest.json) ## Bibliographic details - 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** - [Türkiye: Dengesizlikleri Artırmadan Büyümeyi Canlandırma (Markdown version)](/external/lang/turkish/np/blog/2014/011414t.pdf.md){rel="alternate" type="text/markdown"} - [Türkiye: Dengesizlikleri Artırmadan Büyümeyi Canlandırma (PDF)](/external/lang/turkish/np/blog/2014/011414t.pdf){rel="external" type="application/pdf"} - **Country Report** - [Country Report (Markdown version)](/external/pubs/ft/scr/2013/cr13363.pdf.md){rel="alternate" type="text/markdown"} - [Country Report (PDF)](/external/pubs/ft/scr/2013/cr13363.pdf){rel="external" type="application/pdf"} - **Country Report** - [Country Report (Markdown version)](/external/pubs/ft/scr/2013/cr13364.pdf.md){rel="alternate" type="text/markdown"} - [Country Report (PDF)](/external/pubs/ft/scr/2013/cr13364.pdf){rel="external" type="application/pdf"} --- ## References - [https://www.imf.org/wp-content/uploads/2014/01/actual-and-current-trend-account.jpg](https://www.imf.org/wp-content/uploads/2014/01/actual-and-current-trend-account.jpg) - [https://www.imf.org/wp-content/uploads/2014/01/expenditure-composition.jpg](https://www.imf.org/wp-content/uploads/2014/01/expenditure-composition.jpg) _Source: https://www.imf.org/en/blogs/articles/2014/01/14/turkey-how-to-boost-growth-without-increasing-imbalances_