Publication - 2017 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR TURKEY
1. Turkey has a dynamic economy, but needs to invigorate growth. Since the 2001 financial crisis, strengthened macroeconomic policies have dramatically improved socio-economic outcomes. Over the period, real per capita income increased by 50 percent, the incidence of poverty was more than halved, and life expectancy increased by 5 years.
Enrolment and graduation rates increased significantly at all education levels, while gender gaps narrowed. The transformation into an industrial and service economy is ongoing, with agriculture still accounting for over one fifth of total employment. However, Turkey’s catch-up with advanced economies has slowed since 2008, and progress has increasingly diverged from the historic record of best performers. Moreover, growth has been unbalanced, as it has been accompanied by rising private sector and external indebtedness, leading to increased private balance-sheet stress.
2. Political and economic uncertainty have increased following the failed coup attempt in July 2016. Since then, a state of emergency has been imposed. More than 140,000 public employees, including one fifth of all judges and prosecutors and over one third of the staff of the banking supervisory agency (BRSA) and some economic ministries, have been suspended or dismissed. Around 40,000 people have been detained and over 4,000 companies and institutions with assets of close to US$4 billion have been shut, or taken over by the state. A referendum that would expand presidential powers is likely in 2017.
3. Following a strong performance in the preceding year, growth slowed in 2016. In the first half of 2016, GDP growth was 3.9 percent (year-on-year), but its quarter-on-quarter pace decelerated sharply, despite the easing of fiscal and monetary policies. Growth remains consumption-driven, reflecting the boost to real disposable incomes from the January minimum wage hike and low energy prices. Investment is weak, on the back of heightened uncertainty and a sharp deceleration of credit growth. The external sector subtracted from growth, due to the surge in real imports and fall in tourist arrivals. The latter has had a negative effect on a range of sectors, especially for accommodation, transportation, and food services (Box 1).
4 . Output contracted in the third quarter, but some pickup is expected by the year’s end. Security concerns and Russian sanctions cut the number of tourists from Europe by a quarter and from Russia by more than two-thirds in January-September. Also, the cereals harvest is estimated to be 9 percent lower than last year’s. The failed coup attempt and its aftermath have further disrupted economic activity. While the outlook for industrial production has recently improved, economic sentiment remains subdued amid heightened uncertainty. Government measures to spur consumption and investment and the gradual removal of Russian sanctions would contribute to the expected pickup of economic activity in the last quarter of 2016.
5. The unemployment rate has increased steadily since March, as the labor force grew faster than employment. The 30 percent minimum wage increase boosted average real hourly wages in the formal sector—by more than 10 percent in construction and services, and to a smaller extent in industry. The number of hours worked in the formal sector fell, while employment in the grey economy increased. At the same time, public employment in the education and health-care sectors grew strongly. Between May and July, seasonally-adjusted employment declined by 2.5 percent in industry and 5 percent in construction.
6. Inflation has moderated but remains volatile and well above target. Inflation volatility is mainly driven by unprocessed food and energy prices. The latter reflect oil price changes, the September fuel tax hike and October cut in the administered price of gas, as well as exchange rate pass-through. The economic slowdown and REER appreciation dampened core inflation, though it remains elevated, reflecting unanchored expectations.
7. The central bank (CBRT) has eased monetary conditions in the process of simplifying the monetary framework. From March to end-September 2016, the CBRT gradually lowered the overnight lending rate by 250 basis points to 8¼ percent, leading to a commensurate decline in the interbank overnight lending rate. At end-November, the CBRT raised the one-week repo and overnight lending rates after a steep Lira depreciation. In the wake of the failed coup attempt, the CBRT lowered reserve requirements, allowed greater use of gold and foreign currency, and offered unlimited Lira liquidity against FX collateral. In an effort to release FX liquidity, the latter was capped again at end-November with higher than the pre-coup attempt limits and changes were made to the reserve option mechanism and reserve requirements in FX.
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