Turkey's economic recovery remains "fragile" amid persistent fiscal vulnerabilities, highlighting the need for a comprehensive reform package to ensure more resilient growth, according to the International Monetary Fund (IMF).
Turkish policymakers should ensure that fiscal policy remains the key anchor, the lender said in a statement on Friday evening after concluding Article IV consultations with Ankara. The country must adopt "prudent" policies to manage fiscal weaknesses including low reserve buffers, large external financing needs, and stressed bank and corporate balance sheets, it noted.
"While the recent fiscal stimulus has helped the economy recover, the underlying deficit has increased significantly. [The IMF] directors recommended a broadly neutral fiscal stance in 2020," the Washington-based lender said in its executive board assessment. "A modest consolidation is needed over the medium term to ensure that public debt remains low and stable."
Turkey is grappling with a central government budget deficit that widened this year as it increased spending after a currency crisis that pushed the country into a recession in late 2018. Government spending rose by more than 20 per cent while revenue showed subdued growth. Ankara forecast its budget deficit for 2019 to be 80.6 billion lira (Dh49.7bn), which is projected to widen to 138.9 billion lira in 2020, Reuters reported.
Inflation in the country is expected to rise above 11 per cent in December, below a projected level of 12 per cent as it closes a volatile year, a Reuters poll showed on Friday. Inflation surged to a 15-year high above 25 per cent in October of last year in the wake of the lira crisis.
"Given still-high inflation expectations, directors stressed that monetary policy should focus on durably lowering inflation, which would help permanently lower interest rates," the IMF said. "In this context, they [the directors] noted that recent monetary policy easing has gone too far."
The IMF also called for clearer monetary and intervention policy to bolster transparency and central bank credibility and recommended rebuilding the country's international reserves.
The Turkish central bank held interest rates at 7.75 per cent on Friday, but raised reserve requirement ratios for foreign currency deposits and participation funds by 200 basis points in a step that will support financial stability, Bloomberg reported on Saturday.
“As a result of these revisions, approximately $2.9bn of forex liquidity will be withdrawn from the market,” the central bank said in a statement.
The move is seen as largely intended to boost official reserves, a day after the IMF warned policymakers that Turkey's external buffers remain low and foreign financing requirements are high.
The IMF pointed to the rapid credit growth of state-owned banks, encouraging Ankara to take measures to rein in lending and "clean up" bank and corporate balance sheets to support financial stability.
"[The IMF] directors generally agreed that a third-party asset quality review and new stress tests are needed to better understand underlying bank health," it said. "Additional reforms to improve the insolvency regime and out-of-court restructuring would also help release resources and restart productive lending."
The IMF called for "focused and carefully sequenced" structural reforms to enhance medium-term growth and increase resilience to shocks.
Improving labour market flexibility, the quality of human capital, and female labour force participation would facilitate a reallocation of resources to productive sectors, it said. Governance reforms would also help improve the investment climate and economic efficiency.
"To bolster Turkey’s sustainable medium-term growth prospects, structural reforms should be implemented sooner rather than later," the report said. "The main policy challenge is … to move the focus from short-run growth to higher and more resilient medium-term growth through a comprehensive reform package."
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