## Turkey: Concluding Statement of the 2017 Article IV Mission _IMF News, November 4, 2016_ ## Source details **Canonical URL:** [Turkey: Concluding Statement of the 2017 Article IV Mission](https://www.imf.org/en/news/articles/2016/11/04/ms110416-turkey-concluding-statement-of-the-2017-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2016/11/04/ms110416-turkey-concluding-statement-of-the-2017-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2016/11/04/ms110416-turkey-concluding-statement-of-the-2017-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2016/11/04/ms110416-turkey-concluding-statement-of-the-2017-article-iv-mission/bundle-manifest.json) ## Bibliographic details - Published: November 4, 2016 --- ### Key macroeconomic findings - Output growth is projected to decline to 2.9 percent in 2016, following a strong performance last year, due to weak business confidence and negative domestic and external shocks. - The unemployment rate is high and rising. - Credit growth has slowed significantly. - Uncertainty has increased due to geopolitical tensions and the July 15 failed coup attempt and its aftermath. - Inflation has declined somewhat but is expected to remain well above the authorities’ five percent target; the 30 percent minimum wage increase and sticky expectations are likely to keep inflation at about 8 percent in 2016 and 2017. - The current account deficit is projected at 4½ percent of GDP in 2016; the external position remains weaker than the level consistent with medium-term fundamentals and the current account deficit is expected to widen in 2017 due to higher projected oil prices and a wider fiscal deficit. - Significant external financing needs remain; despite some increase in average maturity of external debt, annual rollover needs remain close to a quarter of GDP. - Recent rating downgrades contributed to an increase in the cost of foreign funding. - Favorable external conditions have helped, but external financing needs limit fiscal space. ### Overall policy agenda - Main challenge: avoid an excessive slowdown that could trigger a deleveraging cycle. - Use favorable external financing conditions to: - rebuild buffers, - reduce inflation, - address external imbalances. ### Fiscal policy recommendations - A moderate fiscal loosening is appropriate, accompanied by a credible medium-term consolidation plan. - For 2017, a discretionary expansion of about ½ percent of GDP would support domestic demand without contributing significantly to external imbalances. - Authorities could consider an extension of the minimum wage subsidy at a reduced level to support employment. - Increase in public investment is welcome but should be directed towards high return projects. - Newly introduced project-based incentives may not meet expectations given uncertainty and elevated private debt burden. - The envisioned fiscal consolidation in the Medium-Term Plan should be backed by credible measures. - Enhance management of fiscal risks as PPP portfolio and related guarantees expand and contingent liabilities increase. - Stronger central oversight, approval, and disclosure are needed, covering guarantees issued by entities other than the Treasury. - Passage of a comprehensive PPP framework law would help. - Governance of the sovereign wealth fund should be aligned with international best practices. ### Monetary policy recommendations - Maintain the current monetary stance without further easing to balance containing inflation against a slowing economy. - Simplify the monetary framework so that all liquidity is provided at the policy rate to improve transmission. - Gradually withdraw the enhanced provision of Lira liquidity that followed the failed coup attempt. - Increase reserves further; the CBRT’s focus on boosting net reserves should be maintained. - Although the economy has buffers to sustain short-lived moderate capital outflows, Lira depreciation puts pressure on nonfinancial corporate sector balance sheets. - Suspension of regular foreign exchange auctions is welcome. ### Financial sector policy recommendations - Bank capital levels remain high, although some buffers are decreasing; indicators of asset quality have deteriorated, especially in the household and SME sectors. - Regulatory changes enable banks to restructure loans in tourism and energy sectors, as well as consumer loans and credit cards. - Build on the enhanced legal framework for financial regulation by further strengthening supervisory processes and governance standards in banks. - Strengthen macroprudential measures to lower foreign exchange risk in the economy. - The economic slowdown is increasing these risks. - Macroprudential measures should not be relaxed for demand management purposes. ### Structural policy recommendations - Rebuild business confidence and ensure public institutional capacity. - Continue improving the investment climate by simplifying procedures for starting a business and enhancing the efficiency of the legal system. - The new pension auto-enrollment law is a welcome step, but its impact on aggregate savings is likely to be small and the reform has a few design shortcomings which could impede its effectiveness. - Labor market reforms should aim at boosting productivity and participation: - Ease labor market rigidities (e.g., recent amendments to the labor law on flexible employment) to help reduce informality and encourage higher labor force participation. - Accelerate reform of the severance pay system. - Future minimum wage increases should be in line with expected inflation and productivity gains. - The cost of labor should be appropriately differentiated according to regional economic developments. - Better integration of refugees would provide stronger economic benefits: - Legislative changes of January 2016 allow Syrian refugees to apply for work permits, but uptake has been low in part due to skill mismatches. - A simplified application process together with an effective communication strategy could improve integration into formal employment. - Mobilizing international assistance would improve access to education, health care, and public utilities. *Concluding statement of the IMF mission to Turkey, November 4, 2016.* --- ## References - [Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm) - [Mission Concluding Statements](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2016/11/04/ms110416-turkey-concluding-statement-of-the-2017-article-iv-mission_