IMF Executive Board Concludes 2007 Article IV Consultation with Turkey

Public Information Notice (PIN) No. 07/66
June 12, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 18, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkey.1


Turkey has experienced an impressive economic revival in recent years. Sound economic policies anchored to Fund arrangements, as well as political stability and favorable external conditions, have resulted in average annual growth of 7½ percent since 2002. Private consumption and investment have been the main drivers, fueled by declining real interest rates, surging capital inflows, rapid credit expansion, and rising productivity. Meanwhile, inflation has dropped dramatically over the past five years.

The real economy has undergone significant modernization, becoming less reliant on traditional sectors and more open to trade and foreign investment. Exports have continued to gain market shares, as the effects of an appreciating currency have been largely offset by productivity gains. Slack in the labor market has kept labor costs in check.

Balance sheets have also strengthened. Public debt ratios have come down considerably, and the composition of debt has improved. Bank balance sheets have also become more robust.

These positive outcomes have been driven, in large part, by disciplined policies and advances in structural reforms. On the macroeconomic side, adherence to the 6.5 percent of GNP primary surplus target combined with monetary policy restraint by an independent central bank have helped bring down inflation, strengthen confidence, and ease real interest rates. The floating exchange rate has been an effective shock absorber and has provided good incentives for managing currency risks. On the structural side, bank recapitalization and enhanced supervision, tax reforms, and privatization have restarted private credit growth, promoted FDI, and spurred competitiveness.

Still, the Turkish economy faces a number of macroeconomic challenges. In particular, the economy's dependence on large capital inflows exposes Turkey to swings in investor sentiment (as witnessed during recent periods of market turbulence). Also, inflation well above target (due to a series of supply shocks, currency depreciation, and inertia in expectations) continues to require tight monetary policy. And, in order to sustain and build on recent improvements in growth, a number of structural challenges need to be tackled. These include a low employment rate, still limited financial intermediation, a large informal sector, and potential bottlenecks in electricity supply.

Executive Board Assessment

Turkey's macroeconomic performance in recent years has been impressive, combining strong growth with a sustained reduction of inflation. This owed much to the authorities' disciplined macroeconomic policies, strengthened economic institutions, and structural reforms, in a context of favorable external conditions, political stability, and firm commitment to Fund arrangements. Directors considered, however, that Turkey needs to manage vulnerabilities carefully and address structural challenges to increase the economy's growth potential and resilience to shocks.

Directors welcomed the significant progress made in addressing the large imbalances inherited from the 2001 crisis. They called on the authorities to build on this progress by further reducing public debt and bringing inflation to the low single digits. They observed that new vulnerabilities have arisen as a byproduct of the recent strong performance. In particular, large capital inflows fuel lira appreciation and a widening current account deficit, exposing Turkey to sudden shifts in market sentiment. This calls for maintaining fiscal and monetary discipline and preserving the floating exchange rate as a useful shock absorber. It also puts a premium on continuing to build buffers in balance sheets and improve financing structures. In this regard, Directors supported the authorities' plan to increase gradually and predictably the level of international reserves.

Directors agreed that a tight fiscal policy has been key to achieving the primary fiscal surpluses and the recent economic successes, but considered that too much reliance may have been placed on revenue increases and investment restraint. Going forward, fiscal discipline-possibly underpinned by a fiscal rule-will continue to be needed to reduce debt, support disinflation, and buttress market confidence. Tight control over current spending will facilitate efforts to ease the heavy tax burden, especially on labor and financial transactions. Noting the spending overruns in early 2007, Directors welcomed the plans to bring the fiscal position back on track, and encouraged the authorities to adhere closely to them in order to achieve the 2007 primary surplus target of 6.7 percent of GNP.

Directors supported the measures to increase fiscal transparency and the reform of personal income taxation. They called for further fiscal reforms to contain nondiscretionary spending. Revised social security legislation that preserves the savings targeted in the 2006 reform law should be adopted as soon as possible. Social services efficiency should be improved, and civil service pay rationalized. Continued reforms to improve tax collection will be essential to create fiscal space. In that connection, Directors called for continued efforts to reduce fragmentation in tax administration and make the large taxpayer unit fully effective.

Directors underscored the importance of achieving a low single-digit inflation rate to reduce still-high real interest rates. They endorsed the central bank's tight monetary stance, and its intention to defer interest rate cuts until inflation is firmly on a path toward the 4 percent target. Directors emphasized that preserving central bank independence will be essential for the success of inflation targeting.

Directors stressed the need to deepen financial intermediation while preserving the soundness of the financial system. They commended the authorities for adopting the mortgage law and beginning the privatization of Halkbank. To ensure that rapid credit growth does not compromise bank soundness, they called for stepping up supervisory oversight, tightening provisioning requirements further, and improving the timeliness of corporate balance sheet data.

Directors considered that removing impediments to employment creation and labor productivity growth is crucial for enhancing the economy's growth potential, with an easing of labor regulation a priority. Reductions in labor taxes are needed, provided that they do not compromise the debt reduction objective. Directors encouraged the authorities to advance the privatization program. Restructuring the energy sector, by privatizing electricity distribution companies and allowing better cost-recovery pricing, will be particularly important.

Turkey: Selected Economic Indicators, 2001−07

  2001 2002 2003 2004 2005 2006 2007
            Est. Proj.

Real sector


Real GNP growth rate

-9.5 7.9 5.9 9.9 7.6 6.0 5.0

Private consumption growth rate

-9.2 2.1 6.6 10.1 8.8 5.2 3.3

Private gross fixed investment growth rate

-34.9 -5.3 20.3 45.5 23.6 17.3 6.1

Final domestic demand growth rate

-9.2 2.1 6.6 10.1 8.8 5.2 3.3

GNP deflator growth rate

55.3 44.4 22.5 9.5 5.3 11.7 7.0

Nominal GNP growth rate

40.5 55.8 29.7 20.3 13.4 18.4 12.4

CPI inflation (12-month; end-of period)

68.5 29.7 18.4 9.4 7.7 9.7 6.0

PPI inflation (12-month; end-of-period)

88.6 30.8 13.9 15.3 2.7 11.6 5.6

Unemployment rate

10.4 11.0 10.3 10.3 10.2 9.9 ...

Average nominal treasury bill interest rate

93.6 64.6 45.1 24.7 16.2 18.1 ...

Average ex-ante real interest rate

35.5 30.5 33.9 15.3 6.0 9.3 ...

Central government budget

(Percent of GNP, unless otherwise indicated)

Primary balance

4.8 3.5 4.9 5.3 5.5 5.8 5.2

Net interest payments

22.2 17.3 16.1 12.3 7.7 5.8 5.9

Overall balance

-17.4 -13.8 -11.2 -7.1 -2.2 0.1 -0.7

Consolidated public sector


Primary balance

5.5 5.1 6.2 7.2 6.8 6.6 6.7

Net interest payments

22.6 17.6 15.4 11.7 7.9 7.4 7.6

Overall balance

-17.1 -12.5 -9.1 -4.6 -1.2 -0.8 -0.9

Net debt of public sector

90.4 78.4 70.3 64.0 55.3 44.8 40.9

Net external

37.5 32.1 21.9 17.4 8.5 7.3 7.1

Net domestic

52.9 46.3 48.4 46.5 46.8 37.5 33.8

Share of FX debt (percent of gross public debt)

57.8 58.1 46.3 41.5 37.6 36.1 32.9

External sector


Current account balance

2.4 -0.8 -3.4 -5.2 -6.3 -7.9 -7.3

Exports of goods and non-factor services

36.1 31.0 30.1 30.5 29.3 29.7 30.3

Volume growth (goods only, percent)

15.7 17.2 19.1 15.0 10.1 11.7 10.3

Imports of goods and non-factor services

31.7 30.1 31.3 33.8 34.0 35.9 35.7

Volume growth (goods only, percent)

-23.8 26.1 24.6 22.2 11.8 8.2 7.4

Trade balance

-2.6 -4.0 -5.9 -7.9 -9.3 -10.0 -9.3

Of which: energy (billions of U.S. dollars)

-7.8 -8.5 -10.6 -13.0 -18.6 -25.0 -26.6

Gross external debt 1/

93.1 77.3 56.4 50.1 46.7 50.5 52.8

Net external debt 1/

64.3 52.8 37.6 32.0 27.3 26.9 28.5

Foreign direct investment (net)

1.9 0.5 0.5 0.7 2.4 4.8 3.5

Short-term external debt (by remaining maturity)

22.6 19.3 17.3 17.2 16.4 18.2 16.9

Monetary aggregates


Nominal growth of M2Y broad money (percent)

87.5 25.4 13.0 22.1 24.5 24.1 14.9

(Billions of U.S. dollars, unless otherwise indicated)

Privatization proceeds 2/

2.8 0.5 0.2 1.3 3.8 9.6 ...

Net external financing of central government

8.4 6.7 -0.7 -2.7 -4.1 -0.6 ...


-6.7 -11.4 -8.7 -11.7 -14.1 -13.5 ...

Gross borrowing

15.0 18.1 8.0 8.9 10.0 13.0 ...

Of which: Eurobond issues

2.2 3.3 5.3 5.8 6.5 5.8 ...


144.0 182.7 238.5 301.5 361.9 401.4 ...

GNP (billions of Turkish lira)

176.5 275.0 356.7 428.9 486.4 575.8 646.9

Per capita GDP (2006): $5,534

Poverty Rate (2003): 26 percent (WB poverty line estimate)

Sources: Turkish authorities; and IMF staff estimates and projections.

1/ Debt ratios valued at end-year exchange rates.

2/ Privatization revenue received by fiscal authorities.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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