## IMF Survey : Turkey: Increasing Saving to Reduce Vulnerabilities

_IMF News, December 20, 2013_

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**Canonical URL:** [IMF Survey : Turkey: Increasing Saving to Reduce Vulnerabilities](https://www.imf.org/en/news/articles/2015/09/28/04/53/socar122013a)

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## Bibliographic details
- Published: December 20, 2013

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### Overview
- Turkey’s economy holds much promise due to geographical location, young population, and a vibrant private sector.
- To join high-income countries, Turkey must make the economy more competitive and reduce its external deficit.

### Economic performance in 2013
- Growth accelerated to 3.7 percent in the first half of 2013, supported by successive interest rate reductions and increased public sector infrastructure spending.
- Good performance in the first 5 months of the year and an investment credit upgrade provided ample external financing.
- Market sentiment shifted in late May 2013 with fears of U.S. Federal Reserve tapering: currency depreciation, higher interest rates, tightened financing conditions, and subsequent slowdown.
- Despite turbulence, Turkey was likely to experience growth of close to 4 percent in 2013, but with a deteriorating external account and higher-than-desirable inflation.

### External vulnerabilities and domestic saving
- Private sector savings has fallen significantly over the last 15 years, contributing to a low domestic savings rate and a large external deficit.
- Key statistics:
  - Required investment to sustain 4 percent growth: close to 21 percent of GDP.
  - Domestic savings rate: about 14 percent of GDP.
  - Saving deficit to be filled by external financing: about 7 percent of GDP.
  - Target domestic savings to sustain high growth and reduce external financing dependence: about 18 percent of GDP.
- External financing that fills the saving deficit often takes the form of volatile portfolio inflows or short-term borrowing.

### Monetary and fiscal policy framework
- Monetary framework aims to maintain price and financial stability and discourage volatility in short-term capital inflows.
- The framework has not allowed the central bank to meet its inflation target of 5 percent.
- Complexity of the framework complicates communication and expectation management; reduced policy uncertainty and gradual tightening are expected to help steer inflation expectations lower.
- Turkey needs a tighter monetary and fiscal stance to ensure a decline in the current account deficit and inflation.
- Overall balance sheets are generally sound and provide buffers against plausible growth and exchange rate shocks from Fed normalization, but the external imbalance requires careful policy calibration.

### Structural reforms and competitiveness
- No single reform suffices; priorities must be sequenced to address competitiveness and increase domestic savings.
- Critical structural areas:
  - Labor market reforms.
  - Education reforms to boost human capital.
  - Strengthening the business environment and improving labor market functioning.
- These reforms should help attract more foreign direct investment and support a shift toward high-value added manufacturing and services.

### Policy recommendations and priorities
- Short-term: Central bank should continue normalizing monetary policy to guard against volatility and support short-term stability.
- Medium-term macro priority: Government should increase domestic savings; the public sector must play a larger role to raise savings toward about 18 percent of GDP.
- Complementary actions:
  - Tighten fiscal policy alongside monetary normalization.
  - Pursue structural reforms (labor market, education, business environment) to improve competitiveness and attract FDI.
- Objective: Achieve a sophisticated economy based on high-value added activities that produces continued rises in incomes, jobs, and standards of living while reducing dependence on volatile external financing.

*Source: IMF Survey: Turkey: Increasing Saving to Reduce Vulnerabilities (December 20, 2013).*

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## Content in this bundle

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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)
- [In The News](https://www.imf.org/en/news/search)
- [Read press release](http://www.imf.org/external/np/sec/pr/2013/pr13476.htm)
- [Turkey and the IMF](http://www.imf.org/external/country/tur/index.htm)
- [Emerging markets blog](http://blog-imfdirect.imf.org/2013/10/07/how-emerging-markets-can-get-their-groove-back/)
- [Read IMF study on emerging markets](http://www.imf.org/external/pubs/ft/survey/so/2013/RES121213A.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/socar122013a_