## IMF Executive Board Concludes 2019 Article IV Consultation with Turkey

_IMF News, December 27, 2019_

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## Bibliographic details
- Published: December 27, 2019

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### Macroeconomic developments and outlook
- Growth became increasingly dependent on externally-funded credit and demand stimulus after the global financial crisis, leading to an economy running above potential with a large current account deficit and high inflation.
- These imbalances left the economy susceptible to a change in market sentiment that triggered sizeable lira depreciation and a recession in late 2018.
- Growth resumed in 2019, driven by:
  - Expansionary fiscal policy.
  - Rapid credit provision by state-owned banks.
  - More favorable external financing conditions.
- External adjustment:
  - Import compression and a strong tourism season contributed to a remarkable current account adjustment.
- Inflation and monetary policy:
  - Inflation peaked at around 25 percent in October 2018.
  - The central bank cut policy rates by 1,000 basis points since July 2019.
  - Subsequent drivers of inflation decline: strong base effects, relative lira stability, and a negative output gap.
  - Inflation expectations remain well above target.
- External and balance-sheet vulnerabilities:
  - Reserves are low and external financing needs high.
  - Non-financial corporate and bank balance sheets stressed by lira depreciation, higher interest rates, and lower growth.
  - Public debt is low but the fiscal deficit has increased; uncertainty over contingent liabilities and potential debt rollover pressures limit fiscal space.

### Executive Board Assessment — key findings
- Directors noted that stimulus-driven growth in previous years contributed to large economic imbalances.
- The 2019 recovery is fragile; vulnerabilities include:
  - Low reserve buffers.
  - Large external financing needs.
  - Stressed bank and corporate balance sheets.
- Directors emphasized the need for prudent policies and a comprehensive package of reforms to secure stronger and more resilient medium-term growth.

### Fiscal policy assessment and recommendations
- Fiscal anchor:
  - Fiscal discipline has been a longstanding policy anchor but has been gradually weakening.
  - Central government primary balance recorded a deficit in 2018, the first time in almost a decade.
  - Fiscal stimulus continued in the first half of 2019, contrary to consolidation planned in the late-2018 New Economy Program.
- Recommendations:
  - Fiscal policy should remain a key policy anchor.
  - Adopt a broadly neutral fiscal stance in 2020, combined with tight monetary and quasi‑fiscal policies.
  - Undertake a modest consolidation over the medium term to keep public debt low and stable.
  - Strengthen oversight and management of public-private partnerships (authorities' efforts welcomed).

### Monetary policy and reserves
- Directors' view:
  - Monetary policy should focus on durably lowering inflation to permanently lower interest rates.
  - Recent monetary policy easing has gone too far.
  - Need for clearer monetary and intervention policy to bolster transparency and central bank credibility.
  - Recommendation to rebuild international reserves as conditions allow.

### Banking sector, credit growth, and financial stability
- State-owned banks:
  - State-owned banks have supported rapid credit growth, particularly from early-2019, while private banks cut back lending.
  - Directors emphasized vigilance regarding state-owned banks' rapid credit expansion.
  - Encouraged steps to rein in credit growth.
- Bank health and restructuring:
  - Directors generally agreed on the need for a third‑party asset quality review and new stress tests to better understand bank health.
  - Recommended reforms to improve the insolvency regime and out‑of‑court restructuring to release resources and restart productive lending.
- Objective: Clean up bank and corporate balance sheets to support financial stability and more resilient growth.

### Structural reforms and medium-term growth
- Directors called for focused and carefully sequenced structural reforms to enhance medium‑term growth and resilience:
  - Improve product market efficiency.
  - Increase labor market flexibility.
  - Improve the quality of human capital.
  - Increase female labor force participation to facilitate resource reallocation to productive sectors.
  - Governance reforms to improve the investment climate and economic efficiency.
- Directors commended Turkey for hosting a large number of refugees.

### Key statistics (Table 1: Turkey: Selected Economic Indicators, 2017–24)
- Population (2018): 82 million
- Per capita GDP (2018): US$9,405
- Quota: SDR 4,658.6 million
- Real GDP growth rate:
  - 2017: 7.5
  - 2018: 2.8
  - 2019: 0.2
  - 2020: 3.0
  - 2021: 3.5
  - 2022: (not shown)
  - 2023: (not shown)
  - 2024: (Proj.)
- Contributions to real GDP growth (selected):
  - Private consumption: 2017: 3.7; 2018: 0.0; 2019: -0.1; 2020: 2.6; 2021: 2.0; 2022: 1.9
  - Public consumption: 2017: 0.7; 2018: 1.0; 2019: 0.1; 2020: 0.3; 2021: 0.5
  - Investment (incl. inventories): 2017: 2.9; 2018: -2.4; 2019: -4.7; 2020: 2.2; 2021: 1.6; 2022: 1.3; 2023: 1.2
  - Net exports: 2017: 4.2; 2018: 4.3; 2019: -1.8; 2020: -0.9; 2021: -0.5; 2022: -0.2
- Output gap:
  - 2017: 1.5
  - 2018: -1.1
  - 2019: -0.8
- GDP deflator growth rate:
  - 2017: 11.0
  - 2018: 16.4
  - 2019: 14.4
  - 2020: 11.8
  - 2021: 11.6
  - 2022: 10.9
  - 2023: 10.8
- Inflation (period-average):
  - 2017: 11.1
  - 2018: 16.3
  - 2019: 15.7
  - 2020: 12.6
  - 2021: 12.4
  - 2022: 11.4
- Inflation (end-year):
  - 2017: 11.9
  - 2018: 20.3
  - 2019: 13.5
  - 2020: 12.0
- Unemployment rate:
  - 2017: 13.8
  - 2018: 13.7
  - 2019: 12.9
  - 2020: 12.3
- Fiscal sector (Percent of GDP, unless otherwise noted):
  - Nonfinancial public sector overall balance:
    - 2017: -2.2
    - 2018: -3.8
    - 2019: -5.2
    - 2020: -4.9
    - 2021: -5.3
  - General government overall balance (headline) 1/:
    - 2017: -1.5
    - 2018: -3.0
    - 2019: -3.9
    - 2020: -4.6
    - 2021: -4.5
  - General government gross debt (EU definition):
    - 2017: 28.2
    - 2018: 30.1
    - 2019: 32.2
    - 2020: 33.1
    - 2021: 34.1
    - 2022: 35.4
    - 2023: 36.6
    - 2024: 37.3
- External sector:
  - Current account balance:
    - 2017: -5.6
    - 2018: -3.5
    - 2019: -0.6
    - 2020: -1.3
    - 2021: -1.7
  - Gross external debt:
    - 2017: 53.4
    - 2018: 57.6
    - 2019: 61.3
    - 2020: 55.7
    - 2021: 50.7
    - 2022: 47.7
    - 2023: 46.0
    - 2024: 44.2
  - Gross financing requirement:
    - 2017: 25.0
    - 2018: 26.8
    - 2019: 23.5
    - 2020: 22.3
    - 2021: 21.5
    - 2022: 21.0
    - 2023: 20.2
- Monetary conditions:
  - Real average cost of CBRT funding to banks:
    - 2017: 0.4
    - 2018: 1.4
    - 2019: …
  - Growth of broad money (M2): 2017: 18.4
  - Growth of credit to private sector: 2017: 14.1

*IMF Executive Board Concludes 2019 Article IV Consultation with Turkey — Press Release No. 19/491 (December 27, 2019).*

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## References

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- [Republic of Türkiye and the IMF](http://www.imf.org/external/country/TUR/index.htm)
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- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2019/12/27/pr19491-turkey-imf-executive-board-concludes-2019-article-iv-consultation_