Turkey - Staff Report for the 2013 Article IV Consultation (Electronic book text)

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.