Turkey : Staff Report for the 2013 Article IV Consultation

KEY ISSUES Context: Economic activity has accelerated, in part thanks to pro-cyclical macroeconomic policies. With domestic demand stronger, the current account deficit is widening again from a high level, and inflation remains well above target. Challenges: On current policies, Turkey can only sustain high growth at the expense of growing external imbalances. Short- and medium-run policies should focus on reducing external 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 policy remains too loose given the inflation target. The policy framework should be normalized with a clearer focus on inflation. ? Tighten the fiscal stance. Expenditures should be reined in and higher-than-expected revenues saved. The 2014 budget should target a primary balance consistent with a 0.7 percent of GDP structural improvement. ? There is room for policy action in case of downside risks, but discretionary stimulus should be applied only if growth is expected to turn negative. ? Increasing national savings and improving competitiveness are central to addressing vulnerabilities. Ambitious medium-term fiscal targets (consistent with a 2 percent of GDP consolidation 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 raise savings, as reflected in the 2014 Medium-Term Plan and their 10th development plan. In addition, they introduced macro-prudential measures to address growing leverage by households in line with Fund advice, and more is under consideration. However, they have a more benign view of external vulnerabilities, therefore monetary and fiscal policies are looser than what staff recommends. The authorities also concur that lowering inflation is a key objective, but believe their monetary framework serves them well and intend to continue with the normalization of the policy framework