Turkey: IMF Executive Board Concludes 2018 Article IV Consultation
IMF News, April 30, 2018
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- Published: April 30, 2018
Recent economic performance and emerging imbalances
- Growth recovered strongly in 2017 after a slowdown in 2016.
- Large fiscal stimulus (including increased PPP activity) and a policy-driven credit impulse boosted consumption and investment in 2017.
- Exports increased sharply in 2017, but a pick-up in imports in the second half of the year tempered the growth contribution of net exports.
- The recovery has led to clear signs of overheating: a positive output gap, inflation well above target, and a wider current account deficit.
- Signs of possible oversupply in the building and construction sector are emerging.
Fiscal and quasi-fiscal developments
- Fiscal and quasi-fiscal policies became more expansionary in 2017.
- The fiscal deficit increased in 2017 due to temporary tax reductions, continued minimum wage subsidies, and employment incentives.
- Contingent liabilities are increasing because of still-high public-private partnerships (PPP) activity and the expansion of state loan guarantees.
- Directors emphasized fiscal prudence and further containing fiscal and quasi‑fiscal policies; sustained measures are needed to achieve a general government primary surplus next year.
- Suggested fiscal measures include broadening the revenue base, raising direct taxation, improving VAT efficiency, limiting public wage rigidities, and reducing ad‑hoc subsidies.
- Directors welcomed initiatives to strengthen the PPP risk management and reporting framework and stressed transparency and monitoring of extra‑budgetary entities and the Sovereign Wealth Fund.
Monetary policy, inflation, and reserves
- Monetary policy was tightened, with the central bank (CBRT) increasing the effective cost of funding to banks by almost 500 basis points since November 2016.
- Inflation rose to almost 12 percent during 2017; the ex-post, real effective policy rate remained close to zero until recently.
- Directors called for frontloaded monetary tightening to contain inflation, re‑anchor expectations, underpin the Lira, and allow reserves to be rebuilt.
- Directors recommended moving over time to more conventional monetary instruments to improve transparency and effectiveness and underscored the importance of central bank independence.
Banking sector and financial stability
- The sizeable expansion of state loan guarantees was the main driver behind the acceleration of bank credit growth in 2017; relaxation of macroprudential measures also contributed.
- Commercial loan growth moderated as the impulse from state loan guarantees fell towards the end of 2017.
- Bank capital levels remain high, although some buffers are decreasing; higher profits improved capital adequacy in 2017, partly reflecting the relaxation of prudential norms and the conservation of capital through state loan guarantees.
- The headline non-performing loans ratio remains low, but a broader definition of loan impairment signals emerging loan quality weakness and signs of difficulties in some large corporate borrowers.
- Directors called for further strengthening oversight and governance of the banking sector, supported better targeting of the Credit Guarantee Fund, limits on SME foreign currency borrowing, stronger bank supervision, and a more robust macroprudential regime—particularly addressing risks related to non‑financial corporates with increased leverage and large negative foreign exchange positions.
Outlook and projections
- In 2018, economic activity is expected to decelerate to close to 4½ percent.
- Continued accommodative monetary, fiscal, and financial policies will support growth, but inflation is projected to remain well above target and the current account deficit is expected to remain elevated.
- Executive Directors noted large external financing needs, limited foreign exchange reserves, changes in investor sentiment towards emerging markets, and persistent domestic and geopolitical risks.
Structural reforms and labor market
- Directors encouraged using the current strong growth environment to pursue comprehensive structural reforms to boost productivity and medium‑term growth potential.
- Reform priorities include maintaining strong institutional capacity, improving regulatory predictability to strengthen the investment climate, labor market reforms on public wage indexation, minimum wages, addressing skills gaps, and increasing female labor force participation, including by promoting flexible work options.
- Directors saw merit in further reforms of the voluntary pension system to increase domestic savings.
- Directors commended authorities for hosting a large number of refugees and efforts to integrate them into the labor market.
Selected economic indicators (highlights from Table 1)
- Population (2017): 80.8 million
- Per capita GDP (2017): US$10,512
- Life expectancy (2015): 75.4 years
- Gini index (2016): 40.4
- Quota (2017): SDR 4,658.6 million
- Real GDP growth rate: 2016: 3.2; 2017: 7.0; 2018 Est.: 4.4; 2019 Proj.: 4.0; 2020 Proj.: 3.6; 2021 Proj.: (value missing in source)
- Contributions to real GDP growth (selected): Private consumption 2016: 2.2; 2017: 3.8; Public consumption 2016: 1.3; 2017: 0.2; Investment (incl. inventories) 2016: 1.1; 2017: 2.3; Net exports 2016: -1.4; 2017: 0.7
- GDP deflator growth rate (percent): 2016: 8.1; 2017: 11.0; 2018: 11.6; 2019: 11.1; 2020: 9.3; 2021: 8.2; 2022: 7.8
- Nominal GDP growth rate: 2016: 11.5; 2017: 18.8; 2018: 16.5; 2019: 15.5; 2020: 13.3; 2021: 12; 2022: 11.7
- Inflation (period-average): 2016: 11.4; 2017: 10.5; 2018 Proj.: 9.0; 2019 Proj.: 8.0
- Inflation (end-year): 2016: 8.5; 2017: 11.9; 2018 Proj.: 10.9; 2019 Proj.: 10.0
- Unemployment rate 2016: 10.7
- Nonfinancial public sector primary balance (percent of GDP): 2016: -0.6; 2017: -0.9; 2018 Proj.: -1.5; 2019 Proj.: -1.3; 2020 Proj.: -0.7; 2021 Proj.: -0.3
- Overall balance (percent of GDP): 2016: -2.0; 2017: -2.2; 2018 Proj.: -3.1; 2019 Proj.: -3.3; 2020 Proj.: -2.9; 2021 Proj.: -2.5; 2022 Proj.: -2.4; 2023 Proj.: -2.3
- General government cyclically adjusted primary balance 1/: 2016: -1.9; 2017: -1.2
- General government gross debt (EU definition, percent of GDP): 2016: 28.3; 2017: 28.5; 2018 Proj.: 27.8; 2019 Proj.: 27.9; 2020 Proj.: 28.0; 2021 Proj.: 28.1
- Current account balance (percent of GDP): 2016: -3.8; 2017: -5.5; 2018 Proj.: -5.4; 2019 Proj.: -4.8; 2020 Proj.: -4.5; 2021 Proj.: -3.9; 2022 Proj.: -3.6
- o/w Nonfuel current account balance (percent of GDP): 2016: -1.8; 2017: -1.0; 2018 Proj.: -0.1
- Gross international reserves (billions of US dollars): 2016: 106.3; 2017: 107.7
- Ratio to ARA Metric for emerging markets (percent): 2016: 89.5; 2017: 81.9
- Gross financing requirement (percent of GDP): 2016: 22.9; 2017: 24.9; 2018 Proj.: 25.1; 2019 Proj.: 26.3; 2020 Proj.: 26.5; 2021 Proj.: 26.1; 2022 Proj.: 25.3; 2023 Proj.: 24.4
- Gross external debt (percent of GDP) 2016: 46.9; 2017: 53.2; 2018 Proj.: 54.1; 2019 Proj.: 54.6; 2020 Proj.: 54.3; 2021 Proj.: 53.6; 2022 Proj.: 52.9; 2023 Proj.: 52.1
- Net external debt (percent of GDP): 2016: 30.2; 2017: 35.4; 2018 Proj.: 37.5; 2019 Proj.: 38.9; 2020 Proj.: 39.4; 2021 Proj.: 39.6; 2022 Proj.: 39.5
- Net international investment position (percent of GDP): 2016: -42.4; 2017: -53.4; 2018 Proj.: -55.2; 2019 Proj.: -57.0; 2020 Proj.: -57.9; 2021 Proj.: -58.5; 2022 Proj.: -58.7
- Short-term external debt (by remaining maturity, percent of GDP): 2016: 19.0; 2017: 21.2; 2018 Proj.: 22.7; 2019 Proj.: 23.4; 2020 Proj.: 23.5; 2021 Proj.: 23.1; 2022 Proj.: 21.8; 2023 Proj.: 20.6
- Terms of trade (year-on-year percent change): 2016: 1.7; 2017: 1.2; 2018 Proj.: 0.9; 2019 Proj.: 0.0
- Real average cost of CBRT funding to banks: 0.6
- Nominal growth of M2 broad money: 18.3; 15.7 (years not explicitly labeled in source)
- GDP (billions of U.S. dollars): 2016: 863; 2017: 849
- GDP (billions of Turkish lira): 2016: 2,609; 2017: 3,099; 2018 Proj.: 3,611; 2019 Proj.: 4,170; 2020 Proj.: 4,723; 2021 Proj.: 5,292; 2022 Proj.: 5,913; 2023 Proj.: 6,602
- Real effective exchange rate (year-on-year percent change): 2016: -0.4; 2017: -10.3
Executive Board assessment (summary)
- Directors welcomed Turkey’s solid economic performance in 2017 driven by strong policy stimulus and favorable external conditions.
- Rapid growth has contributed to overheating manifested in widening internal and external imbalances.
- Directors emphasized policies should address imbalances, lower inflation, and strengthen buffers; comprehensive structural reforms are necessary to boost growth prospects.
- Directors recommended frontloaded monetary tightening, fiscal prudence to achieve a general government primary surplus next year, strengthened PPP risk management, greater transparency for extra‑budgetary entities, and stronger bank oversight and macroprudential policy.
- Directors encouraged labor market reforms, measures to increase female labor force participation, and pension reforms to raise domestic savings.
Turkey: IMF Executive Board Concludes 2018 Article IV Consultation (April 30, 2018).
