## IMF Executive Board Concludes 2021 Article IV Consultation with Turkey

_IMF News, June 11, 2021_

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## Bibliographic details
- Published: June 11, 2021

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### Economic context and pre-pandemic vulnerabilities
- Growth became increasingly dependent on externally-funded credit and demand stimulus.
- Large current account deficits were financed mainly by debt, leading to high external financing needs.
- Rapid credit growth, led by state-owned banks, and high inflation undermined monetary policy credibility and fueled deposit dollarization.
- Resulting pressure on the lira contributed to large reserve losses; Turkey entered the pandemic with lower buffers than most peers.

### Pandemic impact and recovery
- Human and economic toll: thousands of lives lost and many livelihoods compromised.
- Recovery profile:
  - Turkey experienced positive economic growth in 2020, among the few countries to do so.
  - Key drivers: large interest rate cuts, rapid credit provision by state-owned banks, administrative and regulatory credit incentives, and extensive liquidity support.
- Labor market: employment has partially recovered, but conditions remain challenging, particularly for females and the youth.
- Fiscal stance: public debt remained contained at around 40 percent of GDP; direct fiscal support was relatively modest and central government deficit widened only marginally in 2020.
- Some fiscal space remains, but is somewhat limited by contingent liabilities and potential debt rollover pressures.

### Evolving vulnerabilities, reserves, and currency dynamics
- Policies that supported the recovery also exacerbated vulnerabilities: higher inflation, increased dollarization, and a large shift in the current account increased pressure on the lira.
- Heavy foreign exchange sales led to steep reserve declines from already-low levels.
- Monetary policy: a shift towards a firm monetary policy stance since the Fall was initially well received but its durability has recently been called into question.
- Currency movement: the lira stands nearly 40 percent below its pre-pandemic level.
- Reserves: gross reserves are well below the recommended adequacy range; net international reserves are negative once foreign exchange swaps with the central bank are subtracted.
- Lira depreciation added to non-financial corporate and bank balance sheet strains.

### Outlook and risks
- Growth projection:
  - Growth should reach about 5¾ percent in 2021, mainly reflecting a large positive carryover from the sharp activity rebound in the second half of 2020, before returning to a lower trend from 2022 onwards.
- Inflation: expected to remain high.
- Reserves: expected to decline further.
- Major risks:
  - Domestic: premature relaxation of monetary and credit policies or other policy missteps that further erode credibility and buffers.
  - External: interest rate increases in advanced economies and higher global risk aversion exposing vulnerabilities.
  - Other: vaccination delays and adverse geopolitical developments.
- Vulnerabilities: high external financing needs, sizeable domestic foreign exchange deposits, and low reserve buffers make the economy vulnerable to shocks and to changes in sentiment at home and abroad.

### Executive Board assessment — findings and priorities
- Recognition:
  - COVID-19 has taken a severe toll, but Turkey’s recovery has been exceptional.
  - Recovery driven by rapid money growth and credit provision by state-owned banks, and extensive liquidity support, while public debt has remained contained.
- Concerns:
  - These policies fueled inflation and external imbalances and exacerbated pre-pandemic vulnerabilities: low reserves, large external financing needs, and dollarization.
- Priorities going forward:
  - Adopt policies to reduce vulnerabilities, mitigate scarring, and improve prospects for durable growth, while responding to pandemic-related needs in the short term.
  - Strongly commendation for hosting many refugees.

### Policy recommendations from Executive Directors
- Monetary policy and central bank framework:
  - Strongly commit to, and deliver, a firm monetary policy stance to bring inflation towards target.
  - Encourage a further timely and well-calibrated tightening if inflation expectations increase further.
  - Strengthen central bank independence.
  - Rebuild high-quality reserves.
  - Further simplify the operational framework and improve policy communication.
- Fiscal policy:
  - Given relatively tight fiscal targets for 2021, scope exists for additional targeted and temporary support in 2021 to help vulnerable sections of society and to minimize scarring.
  - Any support should be accompanied by a credible consolidation plan to lower debt over time, to be legislated now and enacted when the recovery is entrenched.
  - Some Directors saw merit in firm fiscal restraint to reduce persistent imbalances and boost policy credibility.
  - Encourage further steps to strengthen debt management, better monitor quasi-fiscal operations and extra budgetary institutions, and enhance fiscal transparency.
- Financial sector:
  - Reign in and refocus state-owned bank credit growth.
  - Carefully monitor bank foreign exchange liabilities.
  - Gradually reverse regulatory flexibility and loan deferrals as the pandemic recedes.
  - Once the pandemic fades, a third-party asset quality review would help in better understanding underlying bank health.
  - Additional reforms to strengthen regulatory, resolution, and AML/CFT frameworks.
- Structural reforms:
  - Focus on female labor force participation and youth employment.
  - Increase labor market flexibility.
  - Ensure viable but temporarily insolvent firms are restructured while winding down unviable firms.

### Key statistics (from Table 1: Turkey: Selected Economic Indicators, 2019–26)
- Population (2020): 83.6 million
- Per capita GDP (2020): US$8,562
- Quota: SDR 4,658.6 million

Real sector (Percent, unless otherwise noted)
- Real GDP growth rate: 0.9; 1.8; 5.8; 3.3
- Contributions to real GDP growth — Private consumption: 1.7; 3.4; 1.5; 1.9; 2.1; 2.2
- Contributions to real GDP growth — Public consumption: 0.6; 0.3; 0.4; 0.5
- Contributions to real GDP growth — Investment (incl. inventories): -3.8; 7.1; -3.3; 1.4; 1.2; 1.3
- Contributions to real GDP growth — Net exports: 3.2; -7.3; 5.3; 1.0; -0.5; -0.4; -0.7
- Output gap: -0.8; -2.2; 0.0
- GDP deflator growth rate: 13.9; 14.3; 20.4; 11.4; 11.0; 11.5; 12.4; 12.2
- Inflation (period-average): 15.2; 12.3; 16.9; 14.9; 12.8; 12.5
- Inflation (end-year): 11.8; 14.6; 16.5; 14.0
- Unemployment rate: 13.7; 13.2; 10.5

Fiscal sector (Percent of GDP)
- Nonfinancial public sector overall balance: -5.8; -5.4; -6.1; -6.3; -6.5; -6.6; -6.7
- General government overall balance (headline) 1/: -3.7; -4.5; -5.7; -6.0; -6.2; -6.4
- General government gross debt (EU definition): 32.6; 39.5; 40.2; 41.5; 43.4; 44.6; 45.6; 46.5

External sector
- Current account balance: -5.1; -2.7; -1.7; -1.8; -1.9; -2.0
- Gross external debt: 57.2; 62.9; 58.4; 56.7; 52.6; 48.2; 43.8; 40.3
- Gross financing requirement: 22.3; 29.4; 27.6; 25.9; 24.2; 23.0; 21.6; 19.9

Monetary conditions (Percent)
- Real average cost of CBRT funding to banks: 5.4; …
- Growth of broad money (M2): 27.3; 33.9
- Growth of credit to private sector: 10.9; 34.7

*IMF Communications Department. Press Release No. 21/169. June 11, 2021.*

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## References

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- [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)
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_Source: https://www.imf.org/en/news/articles/2021/06/11/pr21169-turkey-imf-executive-board-concludes-2021-article-iv-consultation_