IMF: Stimulus-driven growth created large imbalances in the Turkish economy.
Istanbul, December 29 - The International Monetary Fund (IMF) Executive Directors, noted that stimulus-driven growth in previous years had contributed to large economic imbalances in the Turkish economy, according to the statement on the Article IV consultation, released by the IMF.
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkey.
"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" read the statement. "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, according to the statement, stating that, while the recent fiscal stimulus has helped the economy recover, the underlying deficit has increased significantly and added:
"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."
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, while, governance reforms would also help improve the investment climate and economic efficiency.
Directors commended Turkey for hosting a large number of refugees.
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, according to the IMF, "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, it said, adding that, 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" read the statement, and went on as follows:
"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."
Hibya News Agency