IMF Executive Board Concludes 2019 Article IV Consultation with Turkey
December 27, 2019
On December 9, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkey. [1]
In the wake of the global financial crisis, growth in Turkey became increasingly dependent on externally-funded credit and demand stimulus, and, as a result, Turkey’s economy began 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 ultimately triggered sizeable lira depreciation and was accompanied by a recession in late 2018.
Economic growth has since resumed, buoyed by expansionary fiscal policy, rapid credit provision by state-owned banks, and more favorable external financing conditions. The lira also recovered as market pressures abated. Import compression and a strong tourism season have contributed to a remarkable current account adjustment.
Inflation has fallen sharply, and the central bank cut policy rates by 1,000 basis points since July 2019. Inflation peaked at around 25 percent—five times the target—in October 2018 due, in large part, to high exchange rate passthrough and rising inflation expectations. But strong base effects, relative lira stability, and a negative output gap have since contributed to a steep inflation decline, although inflation expectations remain well above target.
Fiscal discipline, a longstanding policy anchor, has been gradually weakening. After declining for several years, the central government primary balance recorded a deficit in 2018, for the first time in almost a decade. Fiscal stimulus continued in the first half of 2019, in contrast to the consolidation planned in the late-2018 New Economy Program.
State-owned banks are supporting rapid credit growth. While private banks have cut back on their lending, state-owned banks have engaged in a major credit expansion which picked up pace in early-2019.
Reserves are low and external financing needs high. Non-financial corporate and bank balance sheets have been stressed by lira depreciation, higher interest rates, and lower growth. While public debt is low, the fiscal deficit has increased and uncertainty over the possible scale of contingent liabilities and potential debt rollover pressures limit available fiscal space.
Executive Board Assessment [2]
Executive Directors noted that stimulus-driven growth in previous years had contributed to large economic imbalances in the Turkish economy. Following the recession in 2018, expansionary fiscal policy, rapid credit provision by state-owned banks, and more favorable external financing conditions led to a resumption of economic growth. Directors emphasized that the current calm remains fragile and that vulnerabilities persist. These include low reserve buffers, large external financing needs, and stressed bank and corporate balance sheets. Against this background, Directors underscored the importance of prudent policies to address weaknesses and highlighted the need for a comprehensive package of reforms to secure stronger and more resilient growth over the medium term.
Directors emphasized that fiscal policy should remain a key policy anchor. While the recent fiscal stimulus has helped the economy recover, the underlying deficit has increased significantly. Directors recommended a broadly neutral fiscal stance in 2020, combined with tight monetary and quasi‑fiscal policies, to strike a balance between supporting the nascent recovery while also containing financing needs and enhancing fiscal space. They noted that a modest consolidation is needed over the medium term to ensure that public debt remains low and stable. Directors welcomed the authorities’ efforts to strengthen oversight and management of public-private partnerships.
Given still-high inflation expectations, Directors stressed that monetary policy should focus on durably lowering inflation, which would help permanently lower interest rates. In this context, they noted that recent monetary policy easing has gone too far. Directors also called for clearer monetary and intervention policy to bolster transparency and central bank credibility. They recommended rebuilding international reserves as conditions allow.
Directors emphasized that vigilance is needed in view of the rapid credit growth of state-owned banks. They encouraged taking steps to rein in credit growth and clean up bank and corporate balance sheets to support financial stability and stronger, more resilient growth. Directors generally agreed that a third‑party asset quality review and new stress tests are needed to better understand underlying bank health. Additional reforms to improve the insolvency regime and out‑of‑court restructuring would also help release resources and restart productive lending.
Directors called for focused and carefully sequenced structural reforms to enhance medium‑term growth and increase resilience to shocks. In particular, steps to improve product market efficiency, labor market flexibility, the quality of human capital, and female labor force participation would facilitate a reallocation of resources to productive sectors. Governance reforms would also help improve the investment climate and economic efficiency. Directors commended Turkey for hosting a large number of refugees.
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Table 1. Turkey: Selected Economic Indicators, 2017–24 |
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Population (2018): 82 million |
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Per capita GDP (2018): US$9,405 |
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Quota: SDR 4,658.6 million |
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2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
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Proj. |
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Real sector |
(Percent, unless otherwise noted) |
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Real GDP growth rate |
7.5 |
2.8 |
0.2 |
3.0 |
3.0 |
3.0 |
3.5 |
3.5 |
|
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Contributions to real GDP growth |
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Private consumption |
3.7 |
0.0 |
-0.1 |
2.6 |
2.0 |
1.9 |
1.9 |
1.9 |
|
|
Public consumption |
0.7 |
1.0 |
0.7 |
0.1 |
0.3 |
0.3 |
0.5 |
0.5 |
|
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Investment (incl. inventories) |
2.9 |
-2.4 |
-4.7 |
2.2 |
1.6 |
1.3 |
1.2 |
1.2 |
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Net exports |
0.1 |
4.2 |
4.3 |
-1.8 |
-0.9 |
-0.5 |
-0.2 |
-0.1 |
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Output gap |
2.2 |
1.5 |
-1.1 |
-0.8 |
-0.5 |
-0.5 |
-0.2 |
-0.1 |
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|
GDP deflator growth rate |
11.0 |
16.4 |
14.4 |
11.8 |
11.6 |
10.9 |
10.8 |
11.0 |
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Inflation (period-average) |
11.1 |
16.3 |
15.7 |
12.6 |
12.4 |
11.4 |
11.0 |
11.0 |
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Inflation (end-year) |
11.9 |
20.3 |
13.5 |
12.0 |
12.0 |
11.0 |
11.0 |
11.0 |
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Unemployment rate |
10.9 |
11.0 |
13.8 |
13.7 |
12.9 |
12.3 |
11.8 |
11.8 |
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(Percent of GDP, unless otherwise noted) |
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Fiscal sector |
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Nonfinancial public sector overall balance |
-2.2 |
-3.8 |
-5.2 |
-4.9 |
-5.3 |
-5.3 |
-5.3 |
-5.2 |
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General government overall balance (headline) 1/ |
-1.5 |
-2.4 |
-3.0 |
-3.9 |
-4.6 |
-4.6 |
-4.6 |
-4.5 |
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General government gross debt (EU definition) |
28.2 |
30.1 |
32.2 |
33.1 |
34.1 |
35.4 |
36.6 |
37.3 |
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External sector |
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Current account balance |
-5.6 |
-3.5 |
-0.1 |
-0.6 |
-1.3 |
-1.7 |
-1.8 |
-1.8 |
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Gross external debt |
53.4 |
57.6 |
61.3 |
55.7 |
50.7 |
47.7 |
46.0 |
44.2 |
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Gross financing requirement |
25.0 |
26.8 |
23.5 |
23.5 |
22.3 |
21.5 |
21.0 |
20.2 |
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Monetary conditions |
(Percent) |
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Real average cost of CBRT funding to banks |
0.4 |
1.4 |
… |
… |
… |
… |
… |
… |
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Growth of broad money (M2) |
16.4 |
18.4 |
… |
… |
… |
… |
… |
… |
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Growth of credit to private sector |
21.0 |
14.1 |
… |
… |
… |
… |
… |
… |
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Sources: Turkish authorities; and IMF staff estimates and projections. |
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| 1/ Headline (or authorities' definition), which includes items excluded from the IMF 'program' definition. | |||||||||
[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.
2 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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