Public Information Notice: IMF Concludes 2004 Article IV Consultation with Turkey
IMF News, August 10, 2004
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- Published: August 10, 2004
Background and recent macroeconomic developments
- Collapse of the 2000 exchange rate-based disinflation program and floating of the lira in February 2001 led to:
- Banking system heavy losses.
- Inflation soared.
- Economy contracted by nearly 10 percent.
- Public debt climbed to over 90 percent of GNP in 2001, partly owing to the costs of bank restructuring.
- Subsequent policy response and outcomes:
- High primary surpluses, reaching more than 6 percent in 2003, contributed to putting public debt on a sustainable and declining path.
- Debt-to-GNP ratio declined to 70 percent in 2003.
- Market risk premium on Turkish debt fell significantly.
- Adherence to a strict monetary program under the floating exchange rate regime helped establish the Central Bank's credibility and facilitate a dramatic decline in real interest rates.
- Real GDP growth: close to 8 percent in 2002 and 6 percent in 2003; projected to grow by at least 5 percent in 2004.
- Inflation has fallen to its lowest levels in decades and is on track to reach its annual target of 12 percent in 2004.
- Remaining vulnerabilities:
- Rapid increase in domestic demand and a widening current account deficit.
- Large government debt, short maturity, and currency composition as major sources of vulnerability.
- Policy opportunity:
- With a commanding majority in Parliament and no new elections needed for another three years, the government has an opportunity to implement difficult structural reforms.
Executive Board assessment — overarching judgment
- Directors welcomed achievements and commended the authorities for:
- Impressive economic performance with macroeconomic conditions at their best in decades.
- Strategy of disinflation and rapid debt reduction delivering striking results.
- Sustained and rapid growth alongside dramatic reductions in inflation to single digits.
- Large primary surpluses reducing government debt ratios and improving market confidence.
- Significant reduction in real interest rates, an end to decades of continuous exchange rate depreciation, and markedly improved resilience to shocks.
- Persisting concerns:
- Size of public debt, short maturities, and large foreign currency component increase vulnerability to exchange rate and interest rate shocks.
- Need to improve quality of fiscal adjustment and intensify pace of structural reform to sustain achievements and deliver robust medium-term growth.
Short-run challenges and recommended fiscal stance
- Short-run observations:
- Domestic demand growth is exceptionally strong and contributing to a widening current account deficit.
- Authorities have undertaken measures to dampen domestic demand: tight fiscal policy, exceeding primary surplus targets, reducing tax incentives for certain consumer purchases, and state banks reining in lending.
- Repeated increases in minimum wages regretted by Directors, but government sector wage restraint welcomed.
- Policy recommendations:
- Continue to monitor the rising current account deficit carefully.
- Save this year's fiscal overperformance at least until the outlook for the current account stabilizes.
- Be prepared to tighten fiscal policy further if domestic demand continues to be strong.
- Maintain restraint on further large increases in current spending to make room for increased public investment.
Medium-term fiscal and structural priorities
- Central messages:
- Continued fiscal consolidation is central to maintaining performance and strengthening medium-term growth prospects.
- Resisting calls to relax next year's primary surplus targets is important; relaxing targets risks higher real interest rates that will slow growth.
- Continued high primary surpluses in a predictable medium-term framework will help meet considerable public debt repayments and strengthen market confidence.
- Structural and fiscal-reform measures urged:
- Reform of the social security system, which remains in large deficit despite high contribution rates.
- Reform of tax administration to combat widespread tax evasion.
- Resist further large increases in current spending; free resources for public investment.
- Consider more fundamental tax reform aimed at simplifying the system and broadening the tax base.
- Cast plans within a multi-year debt reduction plan to guide fiscal policy and ensure debt sustainability.
Monetary policy and central bank recommendations
- Achievements and targets:
- Commended the Central Bank of Turkey (CBT) and the government for reducing inflation to single digits.
- End-2004 inflation target of 12 percent deemed clearly achievable.
- CBT's skilful use of monetary policy central to achievement, supported by fiscal discipline and public sector wage restraint.
- Recommendations to strengthen monetary framework:
- Preserve central bank independence.
- Back low inflation with continued supportive fiscal and incomes policies.
- Enhance the CBT's monetary framework and increase transparency.
- As first steps: give the monetary policy council more of a role in advising the Governor on interest rate decisions, and time interest rate decisions to coincide with monetary policy council meetings.
Financial sector reform and banking system
- Progress noted:
- Creation of an independent Banking Regulation and Supervision Agency (BRSA).
- Tightening of supervisory practices.
- Recapitalization and restructuring of state banks.
- Triple audit and recapitalization of private banks.
- Banking system much stronger as a result.
- Remaining agenda:
- Accelerate recoveries from bad assets.
- Privatize the state banks.
- Lower distortionary taxes on financial intermediation.
- Legal reform, including passage of a new Banking Act.
Investment climate and labor market
- Recommendations:
- Continue efforts to improve the investment climate to stimulate growth, attract foreign direct investment, and boost jobs.
- Quickly implement steps recommended by the inaugural Investment Advisory Council meeting in mid-March 2004.
- Press ahead with labor market reforms given persistently high unemployment despite strong growth.
Key statistics — Turkey: Selected Economic Indicators, 2000-04 (selected rows preserved exactly)
- Real sector (in percent)
- Real GNP growth rate: 6.3; -9.5; 7.9; 5.9; At least 5
- GNP deflator: 50.9; 55.3; 44.4; 22.5; 11.5
- Nominal GNP growth rate: 60.4; 40.5; 55.8; 29.7; 17.1
- WPI (12-month, end-of-period): 32.7; 88.6; 30.8; 13.9; 14.2
- CPI (12-month, end-of-period): 39.0; 68.5; 18.4; 12.0;
- Central government budget (in percent of GNP)
- Primary balance: 4.6; 4.8; 2.4; 5.0;
- Net interest payments: 15.8; 24.7; 17.5; 16.1; 13.6
- Overall balance: -11.2; -20.0; -15.1; -11.1; -8.6
- Consolidated public sector
- PSBR (including CBT profits): 3.0; 5.5; 4.1; 6.5; 21.9; 26.6; 13.5
- Operational balance: -6.9; -4.7; -4.4; -4.8; -2.9
- Net debt of public sector: 58.3; 93.9; 78.8; 70.5; 70.3
- Net external: 19.0; 37.7; 32.1; 22.2; 22.7
- Net domestic: 39.3; 56.2; 46.7; 48.3; 47.7
- External sector
- Current account balance: -4.9; -0.8; -2.8; -3.5 to -4
- Gross external debt: 59.0; 79.0; 72.1; 61.8; 53.2
- Net external debt: 38.8; 53.8; 54.6; 45.1; 40.7
- Short-term external debt (by remaining maturity): 21.7; 17.9; 16.2
- GNP
- GNP (in billions of U.S. dollars): 201.3; 144.0; 182.7; 238.5; ...
- GNP (in quadrillions of Turkish lira): 125.6; 176.5; 275.0; 356.7; 417.6
- Sources: Data provided by Turkish authorities; and IMF staff estimates.
Public Information Notice: IMF Concludes 2004 Article IV Consultation with Turkey — August 10, 2004.