20210610-IMF-Turkey_2021_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_Turkey_95页_2mb

TURKEY: 2021 ARTICLE IV CONSULTATION SUMMARY

Core Content

The 2021 Article IV consultation with Turkey by the IMF assessed the country's economic performance and policy responses in the context of the pandemic. The consultation highlighted both the remarkable recovery and the increased vulnerabilities that emerged due to the policies implemented during the crisis.

Main Findings

Economic Impact of the Pandemic

• The pandemic had a severe human and economic toll in Turkey, with over 4 million cases and 36,000 deaths reported by late April 2021.
• GDP fell sharply in the second quarter of 2020 due to containment measures and a decline in external demand and tourism.
• Employment dropped to its largest fall on record in the first half of 2020, although unemployment rates remained relatively stable due to a decline in labor force participation.
• Poverty increased by about $1\frac{1}{2}$ million people as a result of the pandemic.

Policy Response

• Monetary Policy: The Central Bank of the Republic of Turkey (CBRT) implemented rapid rate cuts and liquidity support, leading to a large credit expansion and negative real interest rates.
• Fiscal Policy: Direct fiscal support was relatively modest, at about 2% of GDP, with a central government deficit widening only marginally to about 0.5% of GDP in 2020.
• Financial Sector Measures: State-owned banks played a key role in credit expansion, with quasi-fiscal measures such as loan guarantees and service deferrals. The credit gap reached an estimated 25% of GDP, and state-owned banks accounted for 45% of total banking system assets.
• Labor Market Support: Policies included a ban on layoffs, short-term work-retention schemes, wage subsidies, and hiring subsidies to preserve employment.
• Health Sector Support: Additional payments to health personnel, grants for treatment expenses, and investment in new hospitals were implemented.

Recovery and Resilience

• Turkey experienced a strong economic recovery in 2020, with GDP growth reaching about 1.8%.
• Domestic demand saw its highest growth on record in the third quarter of 2020, driven by consumption and investment.
• The output gap was nearly closed by the end of 2020, with remaining slack concentrated in the labor market.

Key Vulnerabilities

• External Vulnerabilities: Turkey entered the pandemic with lower buffers than most peers, including low reserves and high external financing needs.
• Inflation and Currency Pressure: High inflation and increased dollarization put pressure on the lira, leading to heavy foreign exchange sales and steep reserve declines.
• Monetary Policy Credibility: The lira weakened significantly, and the real policy rate turned negative due to the combination of low interest rates and high inflation expectations.
• Financial Sector Strains: Bank balance sheets were under pressure due to lira depreciation and non-performing loans (NPLs). The loan-to-deposit ratio and foreign exchange (FX) denominated debt increased, raising concerns about financial stability.

Outlook and Risks

• Growth Outlook: GDP growth is expected to be strong in 2021, but downside risks have increased. Growth is projected to return to a lower trend from 2022 onwards.
• Inflation and Reserves: Inflation is expected to remain high, and reserves are projected to decline further.
• Risks:
  • Domestic: Premature relaxation of monetary and credit policies, or other missteps, could erode credibility and buffers.
  • External: Interest rate increases in advanced economies and global risk aversion could expose vulnerabilities.
  • Other: Delays in vaccination and adverse geopolitical developments pose additional risks.

Policy Recommendations

• Monetary Policy: Adopt a firm monetary stance to bring inflation under control, with no premature easing and potential tightening if inflation expectations rise.
• Fiscal Policy: Provide targeted and temporary fiscal support while ensuring a credible medium-term consolidation plan.
• Financial Sector: Reining in credit growth, strengthening balance sheets, and conducting a third-party asset quality review once the pandemic subsides.
• Structural Reforms: Focus on increasing female labor force participation and youth employment, improving labor market flexibility, and restructuring viable but temporarily insolvent firms.

Executive Board Assessment

• The Executive Board commended Turkey for its strong recovery and resilience, despite the challenges.
• They emphasized the importance of rebuilding monetary credibility, strengthening central bank independence, and improving policy communication.
• The Board also highlighted the need for fiscal consolidation and greater transparency in public finances.

Key Economic Indicators (2019–2026)

Summary of Key Documents

• Press Release: Summarizes the Executive Board's views on the consultation.
• Staff Report: Provides a detailed analysis of Turkey's economic developments and policy responses.
• Statement by the Executive Director: Offers insights into the IMF's assessment of Turkey's economic situation.

Conclusion

The 2021 Article IV consultation highlighted Turkey's resilience in the face of the pandemic, with strong recovery and growth in 2020. However, the country faces significant challenges, including high inflation, weak reserves, and financial sector vulnerabilities. The IMF recommended a firm monetary stance, targeted fiscal support, and structural reforms to ensure sustainable growth and stability.