NEWS Release - Turkey: Concluding Statement of the 2017 Article IV Mission - November 4, 2016
Copyright: IMF COMMUNICATIONS DEPARTMENT
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A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
The Turkish economy has withstood several shocks. However, increased political uncertainty, a sharp fall in tourism revenues, and a high level of corporate debt are all taking a toll. The current monetary stance balances the need to contain inflation, which is still above target, against the backdrop of a slowing economy.Favorable external conditions have helped so far, but external financing needs remain large and limit fiscal space. Nevertheless, some fiscal loosening is appropriate to support the economy. Macroprudential measures should be strengthened to lower foreign exchange risk.
1. Following a strong performance last year, the economy slowed in 2016. Output growth is projected to decline to 2.9 percent in 2016, due to weak business confidence and negative domestic and external shocks. The unemployment rate is high and rising. Credit growth has slowed significantly. Uncertainty has increased due to geopolitical tensions, as well as the July 15 failed coup attempt and its aftermath.
2. Inflation has declined somewhat but is expected to remain well above the authorities’ five percent target. The 30 percent minimum wage increase and sticky expectations are likely to keep inflation at about 8 percent in 2016 and 2017.
3. The current account deficit remains sizable. The effect of lower energy prices has been broadly offset by the weak tourism season and the current account deficit is projected at 4½ percent of GDP in 2016. The economy’s external position remains weaker than the level consistent with medium-term fundamentals. The current account deficit is expected to widen in 2017, due to higher projected oil prices and a wider fiscal deficit.
4. Significant external financing needs have been comfortably met due to ample global liquidity. Despite some increase in average maturity of external debt, annual rollover needs remain close to a quarter of GDP. The recent rating downgrades contributed to an increase in the cost of foreign funding.
The Policy Agenda
The main challenge is to avoid an excessive slowdown, which could trigger a deleveraging cycle. Favorable external financing conditions should be used to rebuild buffers, reduce inflation, and address external imbalances .
FISCAL POLICY
5. A moderate fiscal loosening is appropriate, but should be accompanied by a credible medium-term consolidation plan. For 2017, a discretionary expansion of about ½ percent of GDP would support domestic demand without contributing significantly to external imbalances. The authorities could consider an extension of the minimum wage subsidy at a reduced level to support employment. The increase in public investment is welcome, but should be directed towards high return projects. The newly introduced project-based incentives may not meet the authorities’ expectations, given the uncertainty and elevated private debt burden. The envisioned fiscal consolidation in the Medium-Term Plan should be backed by credible measures.
6. Enhanced management of fiscal risks is warranted . With continued expansion of the PPP portfolio and related guarantees, contingent liabilities are increasing. Stronger central oversight, approval, and disclosure are needed. This should cover guarantees issued by entities other than the Treasury. Passage of a comprehensive PPP framework law would help in this regard. The mission recommends that the governance of the sovereign wealth fund be aligned with international best practices.
Media Relations
E-mail: media@imf.org
Phone: 202-623-7100
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