## Turkey: Staff Concluding Statement of the 2019 Article IV Mission

_IMF News, September 23, 2019_

## Source details

**Canonical URL:** [Turkey: Staff Concluding Statement of the 2019 Article IV Mission](https://www.imf.org/en/news/articles/2019/09/23/mcs092319-turkey-staff-concluding-statement-of-the-2019-article-iv-mission)

## Other formats

- [Markdown version](/en/news/articles/2019/09/23/mcs092319-turkey-staff-concluding-statement-of-the-2019-article-iv-mission/index.md)
- [Structured JSON version](/en/news/articles/2019/09/23/mcs092319-turkey-staff-concluding-statement-of-the-2019-article-iv-mission/index.json)
- [Bundle manifest](/en/news/articles/2019/09/23/mcs092319-turkey-staff-concluding-statement-of-the-2019-article-iv-mission/bundle-manifest.json)

## Bibliographic details
- Published: September 23, 2019

---

### Background — Growth and Imbalances
- Turkey achieved strong growth in recent decades while imbalances increased.
- Initially, broad-based macroeconomic and structural reforms supported growth, poverty reduction, and income convergence with advanced economies.
- As reforms waned, growth became increasingly dependent on externally-funded credit and demand stimulus.
- By early 2018 the economy was running above potential with a large current account deficit, largely financed by debt-creating flows.
- These imbalances contributed to the August 2018 lira depreciation and an associated recession in the second half of 2018, accompanied by a sharp increase in unemployment.

### Recent Developments — Stimulus and Recovery
- Growth has resumed, aided by policy stimulus:
  - Expansionary fiscal policy, rapid state bank credit provision, a strong contribution of net exports, and more favorable market sentiment supported positive growth in the first half of 2019.
  - Staff expects growth to be positive this year—about ¼ percent—despite large negative carryover effects from last year’s recession.
- Exchange rate and current account:
  - The lira has recovered as market pressures have abated.
  - Import compression and a strong tourism season produced a remarkable current account adjustment; only a small deficit is expected this year.
- Inflation and monetary policy:
  - High real policy rates, lira stability, favorable base effects, and lower inflation allowed the CBRT to cut policy rates.
  - While inflation could fall to single digits over the coming months, staff expects end-year inflation of below 14 percent.

### Outlook — Challenges Remain
- The current calm appears fragile:
  - Reserves remain low, and private sector FX debt and external financing needs are high.
  - Non-financial corporate balance sheets have been stressed by lira depreciation, higher interest rates, and lower growth.
  - Banks report adequate capitalization and moderate NPLs, but loan restructuring has increased and staff expects lagged effects of the recession and the weaker lira to continue to strain asset quality.
  - High dollarization reflects weaker domestic sentiment and state bank funding needs.
  - Public debt is low, but the fiscal deficit has increased and uncertainty over contingent liabilities and potential debt rollover pressures limit fiscal space.
- Prospects and risks:
  - Prospects for strong sustainable growth have weakened.
  - Without consistent implementation of a comprehensive package of reforms, medium-term growth is likely to remain subdued given balance sheet strains.
  - Risks include deterioration in sentiment towards emerging markets, policy implementation risks, and adverse domestic or geopolitical developments.

### Policies — Securing Stronger and More Resilient Growth
- Overarching five-pronged policy response recommended:
  - Tight monetary policy to boost central bank credibility, underpin the lira, durably lower inflation, and strengthen reserves.
  - Steps to bolster medium-term fiscal strength.
  - A comprehensive third party assessment of bank assets and new stress tests, with follow-up measures as needed, to further strengthen confidence in banks.
  - Additional steps, building on existing reforms, to strengthen the insolvency and corporate restructuring framework.
  - Focused structural reforms to support productivity growth and increase economic resilience.
- Note: Although reforms may have short-term output tradeoffs, the growth payoffs over the medium- and longer-term are likely to be large, and downside risks would be significantly contained.

#### Monetary Policy: Strengthening Credibility
- Primary objective: durably lower inflation to permanently lower interest rates.
- Staff view and recommendations:
  - The central bank continues to work to enhance its credibility, including by seeking to strengthen its communications.
  - In staff’s view, the CBRT easing cycle has been too aggressive given still-high inflation expectations and the need to mitigate macro-financial risks.
  - Monetary policy should keep rates on hold until there is a durable downturn in inflation and inflation expectations. This would also underpin the lira, allow reserves to be rebuilt, and support de-dollarization.
  - Reduce the many instruments and rates through which liquidity is provided to further clarify the policy stance.
  - Implement a transparent framework for pre-announced FX purchases—with these being the sole preserve of the CBRT—at the appropriate time.
  - As volatility subsides, phase out remaining measures that aimed at containing excessive volatility in capital flows.

#### Fiscal Policy: Preserving the Anchor
- Fiscal policy should remain a key anchor and preserve fiscal space.
- Recent fiscal stimulus helped recovery; unwinding of some measures is welcomed.
- Staff view and recommendations:
  - A neutral fiscal stance next year would still support growth, allowing automatic stabilizers to work, but further discretionary stimulus should be avoided to contain financing needs and preserve fiscal space.
  - Measures of about 1½ percent of GDP over the medium term would help stabilize the debt burden around current, commendably low, levels.
  - Revenue mobilization measures could include broadening the tax base and enhancing revenue efficiency by raising and unifying reduced VAT rates; personal income tax could also benefit from reforms.
  - On spending, remove backward-looking public wage indexation, rationalize subsidies and transfers, and better target social assistance.
  - Strengthen oversight and management of PPPs, integrate PPPs fully into the budgetary process, publish a monitoring report, and introduce a new PPP law ensuring authorization and appraisal are budget-integrated.
  - Consistent budget execution and publication of a fiscal risk statement would further strengthen fiscal credibility.
  - Further monitoring of extra-budgetary institutions is needed; the Turkey Wealth Fund (TWF) risks fragmenting management of public spending outside the budgetary process and its governance could be refined to limit potential conflicts of interest.

#### Financial and Corporate Sector Policies: Stability and Rebalancing
- Clean up bank and corporate balance sheets to support financial stability and resilient growth:
  - Review banks’ impairment and restructuring practices to support durable and sustainable loan repayments.
  - Further pursue efforts to strengthen the current resolution regime.
  - Conduct an early comprehensive third-party asset quality review (AQR) and ensuing stress tests, and implement follow-up measures as needed to shore up market confidence.
- Credit growth:
  - Limit actions aimed at expanding lending, including through state banks and the CGF, ensuring credit is provided only to viable borrowers.
  - Be prepared to use macro-prudential tools to rein in excessive and/or imprudent credit growth.
  - Revisit recent changes that incentivize private bank lending with reserve requirements.
- Insolvency and restructuring:
  - Build on ongoing reforms to strengthen the insolvency regime and out-of-court restructuring.
  - Tighten NPL classification and enforcement to inform better pricing of NPLs and increase the attractiveness of out-of-court solutions.

#### Structural Reforms: Boosting Productivity
- Focused reforms to raise sustainable growth and resilience:
  - Enhance product market efficiency by simplifying business entry and exit, addressing barriers to competition, and allowing automatic energy pricing adjustments.
  - Raise the quality of human capital by upgrading education and on-the-job training.
  - Expand early childhood education and childcare to increase female labor force participation.
  - Improve labor market flexibility by eliminating backward-looking public wage indexation and aligning minimum wages with expected inflation and productivity.
  - Reform severance pay to encourage labor mobility.
- Governance improvements:
  - Improve regulatory predictability and simplify administrative procedures to help the business environment and investment climate.
  - Minimize regulatory forbearance to enhance transparency.
  - Governance improvements would magnify structural reform payoffs.

*Source: Turkey: Staff Concluding Statement of the 2019 Article IV Mission (September 23, 2019).*

---


## References

- [Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [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/2019/09/23/mcs092319-turkey-staff-concluding-statement-of-the-2019-article-iv-mission_