## Turkey: Staff Concluding Statement of the 2021 Article IV Mission

_IMF News, January 25, 2021_

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## Bibliographic details
- Published: January 25, 2021

---

### Mission Concluding Statement — key points
- Pandemic inflicted a heavy human and economic toll on Turkey.
- Policy reaction focused on monetary and credit expansion, producing a strong rebound in growth after the initial shock but exacerbating pre-existing vulnerabilities and leaving the economy more susceptible to domestic and external risks.
- Recent policy pivot away from rapid money and credit growth is welcome.
- Rebuilding buffers could be faster if the pivot persists and is combined with:
  - additional pandemic-focused fiscal support that is temporary and targeted;
  - a credible plan for medium-term fiscal consolidation;
  - focused financial sector and structural reforms.
- Structural reforms should mitigate long-term adverse pandemic effects and include:
  - targeted measures to support the most vulnerable;
  - measures to encourage labor market flexibility;
  - measures to facilitate corporate debt relief.

### The Covid-19 shock: impact and policy response — findings
- Pre-existing vulnerabilities entering 2020:
  - Growth over the past decade driven largely by externally-funded credit and demand stimulus.
  - Resulting vulnerabilities: elevated external financing needs, declining reserves, high inflation, and increasing dollarization.
- Human and health impact:
  - "Almost 25 thousand Turkish people have died and 2.4 million have been infected."
- Initial policy response and macro outcome:
  - Early stimulus relied primarily on rapid monetary and credit expansion, including policy rate cuts, cheap and rapid lending growth by state-owned banks, and administrative and regulatory measures to boost credit.
  - Direct fiscal measures amounted to just 2.5 percent of GDP, mainly tax deferrals and some employment support.
  - Combined measures helped economic activity rebound strongly in Q3 2020 to above pre-pandemic levels; Turkey was among the few countries estimated to have posted positive overall growth in 2020.
- Adverse side-effects of the initial response:
  - Inflation remains well above target, weighing on policy credibility.
  - Increased dollarization, relatively high imports, and financial outflows triggered large-scale foreign exchange intervention aimed at stemming lira depreciation.
- Recent policy pivot (from late-2020):
  - Monetary policy tightening, easing of ad hoc regulatory measures, and marked slowdown in state-owned bank lending helped contain lira pressure and rebuild confidence.
  - Gross reserves have broadly stabilized but remain well below the recommended range and well below most peers.
  - Net international reserves (NIR) remain positive, but once central bank FX swaps are subtracted, the net position is negative.

### Outlook — projections and risks
- Growth:
  - "Turkish GDP is expected to expand by about 6 percent in 2021."
  - From 2022 onwards growth projected to settle back to trend: "about 3½ percent."
- Inflation and current account:
  - Inflation expected to fall modestly by end-2021, and remain well above target.
  - Current account deficit expected to fall to "3½ percent of GDP," driven largely by lower gold imports and modest tourism recovery.
- Employment: expected to continue to recover slowly as the pandemic subsides.
- Risks from low buffers:
  - Low foreign exchange reserves, high external financing needs, and high domestic FX deposits leave the economy vulnerable to shocks and changes in sentiment.
  - Under the current policy set, buffers will be rebuilt gradually.

### Policy recommendation overview — further shift needed
- A further sustained rebalancing of policies would underpin more durable medium-term growth.
- Maintain a firm monetary stance while deploying additional pandemic-focused fiscal support that is temporary and targeted to achieve a broadly neutral but better calibrated policy stance.
- Reforms should rebuild credibility and buffers while addressing pandemic-related human and economic needs.

### Monetary policy — actions to strengthen credibility and buffers
- Maintain a firm monetary policy stance; "further measured monetary policy tightening likely needed should inflation expectations fail to stabilize."
- Avoid premature easing; follow recent CBRT forward guidance to better anchor inflation expectations, sustain capital inflows, and address dollarization.
- Actions would help achieve a stronger lira and higher reserves, especially when combined with broader reforms including:
  - steps to underpin CBRT independence;
  - a timely technical review of the monetary policy framework.
- Develop and implement a transparent reserve accumulation strategy as conditions allow:
  - Reserve buildup should increasingly occur through transparent reserve purchase auctions and be accompanied by consistent and clear communication.
  - Gradual removal of remaining administrative measures designed to support the lira as conditions allow.

### Fiscal policy — addressing pandemic-related needs and medium-term consolidation
- Short-term fiscal support:
  - Deploy additional targeted and temporary fiscal support in 2021; Turkey has some fiscal space, "possibly in the order of 1 percent of GDP."
  - Additional social transfers to vulnerable households and informal workers recommended; further support should be considered if economic conditions deteriorate.
- Medium-term consolidation:
  - Outline a credible and detailed plan for fiscal consolidation now, to be enacted when post-pandemic recovery is well under way.
  - "Consolidation of about 1.5 percent of GDP over the medium term should help put debt again onto a declining path."
  - Consolidation measures could be legislated now and enacted from 2022 onwards and might include:
    - streamlining VAT exemptions;
    - rationalization of ad hoc transfers and subsidies;
    - rationalizing investment incentives.
  - Complementary efforts to find efficiencies in spending are important.
- Fiscal structural reforms:
  - Publish a fiscal risk statement and comprehensive information on quasi-fiscal operations of all SOEs to bolster transparency and credibility.
  - Finalize efforts to strengthen oversight and management of Public Private Partnerships (PPPs), including publishing a monitoring report and finalizing a new PPP law that integrates PPPs with the overall budgetary process (appraisal and authorization).
  - Continue strengthening budget execution.
- Extra-budgetary institutions:
  - Carefully define and monitor the scope and role of extra-budgetary and other non-central government entities with maximum transparency and strong governance.
  - Refine Turkey Wealth Fund’s governance to limit potential conflicts of interest.
- Debt management:
  - Continue strengthening debt management by lengthening borrowing maturities and lowering reliance on domestic FX borrowing; recent moves along these lines are welcome.

### Financial sector policy — reining in credit and strengthening balance sheets
- Credit normalization:
  - Continued normalization of credit growth is positive; credit growth has slowed as policy rates increased and lending-incentivizing regulations were removed.
  - Credit provided through the Credit Guarantee Fund (CGF) was expanded beyond SMEs during the pandemic; going forward such credit should be limited to SMEs in line with the CGF’s original mandate.
- Bank balance sheet issues:
  - Legacy issues on banks’ balance sheets should be more fully recognized over time.
  - As the pandemic recedes, strengthen prudential standards to incentivize recognition of loan losses and proactively draw down capital and liquidity buffers.
  - Phase out forbearance measures and loan deferrals to encourage debt restructuring.
  - Conduct a comprehensive third-party asset quality review and ensuing stress tests to strengthen confidence and develop the market for distressed assets.
  - Avoid delays in proposed revisions to the Banking Law to strengthen BRSA independence and reform resolution frameworks.
  - Authorities intend to proceed with a new Financial Sector Assessment Program in 2021; this is welcomed.
- FX risks:
  - Bank FX liabilities warrant careful monitoring even if regulatory requirements are met.
  - Continue to monitor FX liquidity risks carefully and strictly enforce regulatory limits on open FX positions.

### Mitigating long-term effects of the pandemic — labor markets and corporate distress
- Labor market policies:
  - Address risks to labor markets through targeted measures that support labor market flexibility while providing a sufficient safety net to aid resource re-allocation and job creation.
  - Emphasize female labor force participation, youth unemployment, and informality.
- Corporate debt and restructuring:
  - Corporate debt distress is expected to increase; viable but temporarily-insolvent firms should be quickly restructured as 'going concerns' while unviable firms should be efficiently wound down.
  - 'Out-of-court' restructuring mechanisms are key in current circumstances.
- Combined, these policies would help form the basis for a more durable and inclusive recovery.

*IMF Staff Concluding Statement — January 25, 2021*

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## References

- [IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)
- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [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/2021/01/25/mcs012521-turkey-staff-concluding-statement-of-the-2021-article-iv-mission_