Turkey: Staff Report for the 2013 Article IV Consultation

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Release Date: © December, 2013
ISBN : 978-1-48430-362-7
Stock #: 1TUREA2013001
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KEY ISSUESContext: Economic activity has accelerated, in part thanks to pro-cyclicalmacroeconomic policies. With domestic demand stronger, the current account deficit iswidening again from a high level, and inflation remains well above target.Challenges: On current policies, Turkey can only sustain high growth at the expense ofgrowing external imbalances. Short- and medium-run policies should focus on reducingexternal vulnerabilities, so Turkey can break free of its boom and bust cycles.Key policy recommendations:? Re-establish a nominal anchor. Despite higher interest rates, monetary policyremains too loose given the inflation target. The policy framework should be normalizedwith a clearer focus on inflation.? Tighten the fiscal stance. Expenditures should be reined in and higher-than-expectedrevenues saved. The 2014 budget should target a primary balance consistent with a0.7 percent of GDP structural improvement.? There is room for policy action in case of downside risks, but discretionary stimulusshould be applied only if growth is expected to turn negative.? Increasing national savings and improving competitiveness are central to addressingvulnerabilities. Ambitious medium-term fiscal targets (consistent with a 2 percent of GDPconsolidation over the next five years) and deepened structural reforms are needed.Traction of past Fund advice: The authorities share staff’s view on the need to raisesavings, as reflected in the 2014 Medium-Term Plan and their 10th development plan. Inaddition, they introduced macro-prudential measures to address growing leverage byhouseholds in line with Fund advice, and more is under consideration. However, theyhave a more benign view of external vulnerabilities, therefore monetary and fiscalpolicies are looser than what staff recommends. The authorities also concur thatlowering inflation is a key objective, but believe their monetary framework serves themwell and intend to continue with the normalization of the policy framework.

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