## IMF Survey: Turkey—Navigating Through Choppier Waters

_IMF News, May 9, 2008_

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## Bibliographic details
- Authors: Prakash Kannan, André Meier IMF European Department May
- Published: May 9, 2008

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### Overview and recent performance
- Turkey's economy has performed well since the 2001 crisis but is facing less favorable external conditions.
- Thanks to good policies and a benign external environment, Turkey experienced six years of strong and stable economic performance relative to emerging market peers.
- Global developments are creating headwinds for growth, inflation, and external financing.

### Inflation, supply shocks, and growth outlook
- High global prices for energy and food, combined with the effects of a domestic drought, have recently pushed up Turkish consumer price inflation to 9¾ percent.
- There is a risk that these shocks might cause broader-based price pressures, significantly delaying convergence to the official 4 percent inflation target.
- Growth projections and recent outcomes:
  - Growth is projected to slip to 4.0 percent in 2008 from 4.5 percent in 2007 and 6.9 percent in 2006.
- Global slowdown transmission:
  - IMF staff research suggests that a 1 percentage point reduction in industrial-country growth tends to reduce Turkey's growth by a cumulative 0.8 percentage points over two years.
  - Continued dynamism of other emerging markets should mitigate this impact somewhat; the share of emerging markets in Turkey's total exports rose from 20 percent to 26 percent over the past three years.

### Financial market headwinds and external financing
- Only about half of the total spillover from industrial-country growth comes via the trade channel, highlighting the importance of financial transmission channels.
- Turkish asset prices have tended to respond more strongly to global market fluctuations than any other large emerging market.
- Turkey's external financing requirement and composition:
  - Large external financing requirement—about 17½ percent of GDP in 2008.
  - The composition of external financing has improved, with FDI inflows surging to unprecedented levels and covering half of the current account deficit in 2007.
  - Turkey's stock of gross external debt is 34 percent of GDP.
- Historical trends imply tighter global liquidity would normally reduce capital inflows for Turkey, although data for the last two years point to some decoupling.

### IMF loan review and fiscal position
- The IMF Executive Board on May 9 completed the seventh and final review under the three-year SDR 6.66 billion (about $10.8 billion) Stand-By Arrangement for Turkey.
- Completion of this review enables Turkey to draw immediately the remaining balance under the arrangement, equivalent to $3.65 billion.
- Public sector balance sheets have sharply strengthened, partly offset by an increase in private sector external debt due to extensive corporate borrowing.

### Policy stance and near-term recommendations
- Turkey is in a much stronger position to cope with external headwinds than in the pre-2001 period, having achieved:
  - Fiscal consolidation,
  - Large foreign exchange reserves,
  - Central bank independence and inflation targeting,
  - Progress on privatization,
  - Reforms in social security, tax administration, and the banking sector.
- Short-term policy challenges:
  - Authorities must balance growth concerns with the need to ensure disinflation and external adjustment.
  - Following last year's fiscal slippages, it is critical to stick closely to this year's fiscal target (a primary surplus of at least 3.5 percent of GDP).
  - Engineer a gradual tightening of monetary policy over the coming months.
- The chosen policy mix leaves little margin for error.

### Medium-term reform agenda
- Turkey's medium-term challenge: combine continued macroeconomic policy discipline (close adherence to the announced medium-term fiscal path and convergence to the 4 percent inflation target) with microeconomic reforms to increase resilience and boost potential growth.
- IMF-recommended actions in four main areas:
  - enhancing the institutional framework for fiscal policy by adopting a fiscal rule;
  - making labor markets more flexible;
  - addressing bottlenecks in electricity supply; and
  - deepening financial intermediation.
- Expected outcomes from reforms:
  - Generate fiscal space to lower high marginal tax rates,
  - Create jobs,
  - Reduce informality, and
  - Raise productivity to afford higher living standards on a sustained basis.

*Source: IMF Survey: Turkey—Navigating Through Choppier Waters (May 9, 2008).*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [IMF Country Focus](https://www.imf.org/en/news/country-focus)
- [Turkey and the IMF](https://www.imf.org/external/country/TUR/index.htm)
- [Press release](https://www.imf.org/external/np/sec/pr/2008/pr08106.htm)
- [Turkey's growth](http://www.imf.org/external/pubs/ft/survey/so/2007/CAR0726B.htm)
- [Turkey's labor reform](https://www.imf.org/external/pubs/ft/survey/so/2007/CAR0726A.htm)
- [Turkey's FSAP](https://www.imf.org/external/pubs/cat/longres.cfm?sk=21442.0)
- [IMF Survey article](https://www.imf.org/external/pubs/ft/survey/so/2007/CAR0726B.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar050908a_