Turkey: Staff Report for the Article IV Consultation and Post-Program Monitoring

On the eve of the global financial crisis, the Turkish economy had just concluded a six-year growth surge, spurred by policy reforms and favorable external and domestic conditions. Turkish GDP was hit hard by the onset of the global financial crisis, but quickly retraced its losses. The authorities’ macroeconomic policy response to the severe GDP contraction was broadly appropriate in timing and magnitude and made feasible by the previously conservative stance of policies. Executive Directors underscored the need for bold structural reforms.


On the eve of the global financial crisis, the Turkish economy had just concluded a six-year growth surge, spurred by policy reforms and favorable external and domestic conditions. Turkish GDP was hit hard by the onset of the global financial crisis, but quickly retraced its losses. The authorities’ macroeconomic policy response to the severe GDP contraction was broadly appropriate in timing and magnitude and made feasible by the previously conservative stance of policies. Executive Directors underscored the need for bold structural reforms.

I. Context

A. The Growth Surge (2002-07)

1. On the eve of the global financial crisis, the Turkish economy had just concluded a six-year growth surge, spurred by policy reforms and favorable external and domestic conditions. Greater political stability, policy reforms in the context of Fund-supported programs (including overhaul of financial sector supervision, introduction of inflation targeting, and conservative fiscal targets), and initiation of EU accession negotiations improved confidence in economic management and strengthened fundamentals. Together with strong world growth and bounce back from the 2001 crisis, these factors propelled GDP growth to 6% percent on average during 2002-07. The combination of rapid growth and sound macro policies produced large fiscal primary surpluses, rapid retreat of public debt, moderate inflation, and strong bank and household balance sheets (Box 1).

Sources: Turkstat: and IMF staff estimates.
Sources: Turkish authorities; and IMF staff estimates.
Sources: IMF. World Economic Outlook and IMF staff estimates.
Sources: CBT; and Turkstat.1/The increase in May 2010 corresponds to the switch fro m th e CBT ov ernight bo rrowing rate to th e 7-day repo asthepolicyrate.

Turkey’s Net Financial Asset Position by Sector, 2003-09

As a share of GDP, Turkey’s net financial asset (NFA) position improved during 2003-2007 by 11 percent of GDP as the reduction in public sector (government and central bank) net indebtedness (by some 26 percentage points) more than offset increased leverage by households (10 percentage points) and nonfinancial firms (5 percentage points). Both the public sector and firms have a net financial liability position, while households and banks have a positive position, but with a net liability position for the economy overall (8 percent of GDP).

The global financial crisis interrupted the improvement in aggregate NFA in 2008, largely reflecting the valuation increase in firms’ liabilities from depreciation of the lira. Aggregate NFA resumed improving in 2009—despite a deterioration in the public sector position from the widening fiscal deficit—mainly due to increased household saving, repayment of FX loans by firms, appreciation of the lira, and strong bank profits. For both households and firms, deposit accumulation exceeded new borrowing.

Sources: CBT; and IMF staff estimates.

2. Improved growth prospects, amid abundant global liquidity, attracted strong capital inflows that fueled the economic expansion but also widened the current account deficit. Capital inflows—direct private external borrowing, FDI, and portfolio flows—spurred private investment which, in turn, supported rapid GDP growth. Alongside a cumulative 40 percent appreciation of the CPI-based real exchange rate from 2002 to 2007, imports consistently grew faster than exports, and the current account deficit widened from balance in 2002 to a deficit of 5¾ percent of GDP in 2007.

Sources: Turkstat; CBT; and IMF staff estimates.1/50-50 d c 11 ar-euno basket.

3. Nonetheless, the unemployment rate remained stuck around 10 percent, with a high share of unofficial or semi-official employment. This may reflect significant inefficiencies in the formal sector labor market, including a minimum wage that was increased substantially (tripling in U.S. dollar terms since 2002), is now higher than in almost all new EU member countries, and is binding in lower-income regions of Turkey. Also, Turkey’s severance pay scheme is among the most generous in the OECD (one month per year of tenure), while its regulations on short-term contracts are the most restrictive. As a result, jobs have been squeezed from the formal to the informal sector (wages reported to the Social Security Institution are less than 20 percent of GDP and more than 40 percent of private-sector wage earners report only the minimum wage—also representing a significant tax leakage), or job creation has been discouraged altogether.

Sources: Turkstat: and IMF staff cal culations.
Sources: Turkstat; and IMF staff calculations.

4. While the growth surge created some new vulnerabilities, Turkey entered the global crisis in a stronger position than many other countries in emerging Europe. Standard indicators suggest Turkey’s fundamentals were not as strong as those typical in emerging Asia and Latin America, but vulnerabilities (particularly the current account deficit, external debt, and the cyclically-adjusted primary fiscal deficit) were generally well below levels present in emerging Europe (Figure 1). This reflects the more restrained size of the foreign credit-induced boom, better focus of macro policies on leaning against the cyclical upswing, and the more restrictive regulatory environment for credit.

Figure 1.
Figure 1.

Turkey: Pre-Crisis Strengths and Vulnerabilities, 2007 1/

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Source: IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff calculations.1/ Sample includes all emerging market countries in the IMF Vulnerability exercise, including oil producers in Africa and the Middle East. Regional means are weighted by GDP. Europe Region excludes Russia.

B. Crisis and Recovery (2008-mid 2010)

5. Turkish GDP was hit hard by the onset of the global financial crisis, but quickly retraced its losses (Figure 2). Capital flight, seizing up of bank lending, and collapse of external demand—together with a history of output volatility that was compounded by domestic political turbulence in mid-2008—caused domestic confidence to quickly erode. As a result, investment, including inventories, dropped sharply, with a smaller decline in exports (Box 2). Seasonally adjusted output plummeted 12 percent during Q4 2008 and Q1 2009. However, domestic demand revived strongly beginning in Q2 2009 on improving global sentiment and the consequent reflow of capital, combined with an effective domestic policy response (temporary cuts in consumption taxes and relaxed monetary policy). More recently, inventory restocking abroad has buoyed Turkish exports. The steep recovery cushioned the GDP decline to 4¾ percent for 2009 as a whole and led to a 11¾ percent year-on-year rise in output during the first quarter of 2010.

Figure 2.
Figure 2.

Turkey: Real Sector Developments, 2006-10

(Percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Sources: Turkstat; CNBC; and IMF staff estimates.1/ Values in parentheses denote shares of total value added in 2009.
Source: IMF. World Economic Outlook.1/ Sample includes all emerging market countries included inthe IMF Vulnerability Exercise. Countries with any missingvalue d uri n g th e 1930-2 009 period were excluded.2/ Historical output volatility is measured as the standard deviation of output growth overthe 1930-2 00S period.
Sources: Turkstat: and IMF staff estimates.

Composition of GDP During the Crisis—This Time IS Different

A comparison of Turkey’s GDP collapse during the 2009 global crisis and Turkey’s 2001 financial crisis indicates that, while the overall GDP decline was of a similar magnitude, the underlying expenditure composition was quite different. The global nature of the current crisis made exports much less supportive in 2009 than in 2001, when export growth was even positive. Inventory drawdown was also much deeper in 2009 than in 2001, as the widespread nature and expected long duration of the current crisis at its onset caused firms to run down inventories. Consequently, with the global recovery occurring sooner and stronger than initially anticipated, inventory restockingn has been an important driver of growth since Q2 2009.

Sources: Turkstat; and I MF staff esti m ates.

6. The output gap—while still negative—is closing, and underlying inflation pressures appear contained. Capacity utilization picked up in tandem with the very strong rebound in industrial production. Seasonally adjusted unemployment moderated from a peak of 15 percent in early 2009 to 12½ percent in March 2010. With the negative output gap currently around 1-2 percent, headline and core inflation recently resumed their downward path after being pushed up temporarily in early 2010 on large excise hikes and food price shocks (Figure 3). Inflation expectations are also moderating, but remain near the top of the Central Bank of Turkey’s (CBT’s) uncertainty band around the point target for 2010 and 2011.1

Figure 3.
Figure 3.

Turkey: Inflation Developments, 2006-10

(Percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Sources: Turkstat; CBT; and IMF staff estimates.1/ Inflation decomposition a la Mody and Ohnsorge, 2007. Virtual inflation captures the inflation that would prevail if inflation at the level of detailed subitems of Turkey’s HICP basket were the same as the respective EU-27 average.2/ Index “I” excludes food, nonalcoholic beverages, alcoholic beverages, tobacco, and gold. 3/ Calculated based on 2010 weights.
Sources: Central Bank of Turkey Turkstat; and IMF staff estimates.1/ Both s easonally adjusted and wo rting-day adjusted.
Sources: Eurostat: and IMF staff estimates.1/ Inflation decomposition a la Mody and Ohnsorge,2007 Virtual inflation captures the inflation that would prevail if inflation at the lev el ofdetailedsubitemsof Turkey’s HICP basketwerethesameas the respective EU-27 average.2/ Index “I” excludesfood. nonalcoholic beverages, alcoholic beverages, tobacco, and gold.

7. The current account deficit slumped during the crisis on weak demand, but has recently picked up sharply (Figure 4). After more than halving to 2¼ percent of GDP in 2009, the current account deficit rebounded strongly since late in the year on surging imports, while exports are growing at a slower pace. Reflecting Turkey’s dependence on imported energy and high energy intensity of GDP relative to the EU (likely attributable to relatively low end-user electricity and gas prices), the energy trade deficit has been stable at around 4-5 percent of GDP, in contrast to non-energy imports, which are highly cyclical.

Figure 4.
Figure 4.

Turkey: External Sector Developments, 2006-10

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Sources: Turkstat; and IMF staff estimates.1/ Values in parentheses denote shares of total in April, 2010.
Sources: Eurostat; CBT: an d IMF staff estimates.1/ Gross inland consumption of energy divided by GDP (at constant prices. 1995=100).2/ Prices in elude taxes.3/ Price based on consumption between 2.000 and20.000 megawatt hours.4/ Price based on consumption between 2.500 and 5.000 kilowatt hours.5/ Price based on consumption between 10.000 and 100.000 gigajoules.6/ Pricebased on consumptionbetween 20 and 200 gigajoules.

8. The banking sector displayed considerable resilience to the crisis, helped by a supportive policy environment (Figure 5). Strong capitalization, minimal FX exposure, primarily deposit-based funding, and adequate liquidity allowed banks to weather the financial and output shocks. Policy responses to the crisis—cuts in policy interest rates and relaxation of regulations on loan classification and provisioning (see below)—helped boost profits and capital ratios through wider interest margins, dampened NPLs (which rose from 3.8 percent of total loans at end-2008 to 5.6 percent of total loans at end-2009),2 and a shift in assets to zero-risk-weighted government bonds (on expectations of future declines in the policy rate). As a result, Turkish banks’ profits rose 50 percent in 2009, and the average CAR increased to in excess of 20 percent (the two lowest individual bank CARs were 13 and 15 percent). The authorities’ stress tests indicate the banking system’s CAR would remain above the 12 percent regulatory minimum under severe credit, currency, or interest rate shocks.

Figure 5.
Figure 5.

Turkey: Banking System, 2006-10

(Percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Sources: BRSA; CBT; and IMF staff calculations.

9. Although capital inflows have resumed, their quality has deteriorated since the onset of the crisis. Since late 2008, the composition of external financing shifted from FDI and longer-term debt to shorter-duration and one-off inflows (errors and omissions in the BoP include drawdown of deposits held abroad by nonbanks and repatriations from a tax amnesty). Reflecting in part lower credit demand, corporates’ external indebtedness declined. Turkish financial indicators (nominal exchange rate, equities, CDS spreads) recovered strongly since the start of the emerging market rally in March 2009 (Figure 6).3 Debt rollover rates on borrowing by banks and corporates have more recently picked up (after correcting for changes in FX lending regulations—Box 3), albeit from depressed levels. With capital inflows having recovered, in August 2009 the CBT resumed daily FX purchase auctions—about US$10 billion to date—halted at the onset of the crisis, in order to continue to build reserves (currently at 82 percent of short-term external debt).

Figure 6.
Figure 6.

Turkey: Financial Indicators, 2007-10

(Percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Source: Bloomberg.
Sources: CBT; and IMF staff estimates.
Source: IMF staff estimates.1/ Ratio ofgross international reserves at end-2009 to short-term debt (at original maturity) at end-2009 plus projected amortization of medium-and long-term debt in 2010.

Impact of Recent Regulatory Changes on FX Loans

Two recent regulatory measures (lifting the ban on onshore FX lending to unhedged corporates, and imposing reserve requirements on syndicated and securitized debt contracted by offshore branches) triggered changes in the size and composition of capital inflows that distort the time series on external debt rollovers and credit growth.

Allowing onshore lending in FX to unhedged firms: The June 16, 2009 amendment permits onshore lending in FX to Turkish firms with no FX income, provided the loan is for at least 1 year and for a minimum of US$5 million, or without any condition on maturity or amount if adequately collateralized by FX deposits in a domestic bank branch or FX-denominated bonds issued or guaranteed by an OECD country government or central bank. Previously, domestic unhedged corporates were not permitted to borrow FX onshore and, to evade this restriction, Turkish banks lent in FX through their offshore branches or issued FX-indexed loans onshore. (As before, households are not permitted to borrow in FX and, with the amendment, are no longer permitted to take out FX-indexed loans.) Following the amendment, which aimed to increase transparency, FX credit is gradually shifting from offshore branches to banks’ onshore headquarters (HQ) operations, with the onshore migration expected to proceed in line with the maturity structure of existing offshore loans.

Imposing reserve requirements on debt contracted by offshore branches: From the beginning of 2010, all new syndicated and securitized loans contracted by offshore branches are subject to reserve requirements, thereby equalizing treatment with debt contracted by HQ and reducing the incentive for direct foreign borrowing by offshore branches.

As a result of these regulatory changes, the activities of offshore branches will be reduced, but with little impact on the consolidated (on- and offshore) banking sector. Nonetheless, this will create sizable temporary and permanent effects on rollover rates on foreign loans, external debt, and credit growth:

Sources: BRSA; and IMF staff calculations.
  • Corporates’ external borrowing will decline permanently relative to the counterfactual of unchanged regulations (previously, more than a third of corporates’ external credit stock reflected loans from offshore branches). Gradual migration to onshore loans will temporarily depress corporate external debt rollover ratios.

  • Onshore (corresponding to the residency concept used in the BoP) banks’ external borrowing will permanently increase relative to the no-policy-change counterfactual as they issue directly a larger share of consolidated bank group external debt or—in the event offshore branches continue to issue syndicated loans—receive funds from their offshore branches. During the transition, inflows to HQ banks will increase as offshore branches transfer resources through deposit inflows (drawdown of banks’ foreign assets abroad) and/or more syndicated loans are contracted by HQ banks (increasing banks’ loan rollover ratio, and mirroring the temporary decline in corporate rollovers).

  • Onshore credit growth will temporarily exceed credit growth by the consolidated banking sector, reflecting the shift in origination of FX loans.

  • The composition of external debt will shift from corporates to banks. The level of gross external debt may also decline to the extent that, prior to the regulatory changes, HQ borrowed abroad directly and onlent to foreign branches to fund loans to corporates (creating two foreign borrowing entries in the BoP—one by the HQ bank and the other by the corporate, in addition to an asset outflow corresponding to the buildup of deposits abroad by the HQ bank). With the migration to onshore FX lending, in most cases, only the HQ bank will borrow abroad.

Sources: BRSA; and IMF staff calculations.1/ Staffs adjusted corporate rollover rate uses as its baseline the pre-change share of onshcre FX lending in consolidated banking sector FX lending an d attri butes th e subsequent increase in the share to the regulatory changes.
Sources: CBT. BRSA; and IMF staff calculations.

C. Policy Responses

10. The authorities’ macroeconomic policy response to the severe GDP contraction was broadly appropriate in timing and magnitude and made feasible by the previously conservative stance of policies.

Fiscal policy

11. Cyclical factors and a structural loosening weakened the fiscal balance from mid-2008 to mid-2009. Cyclical revenue loss accounted for the bulk of the deterioration in the nonfinancial public sector (NFPS) primary balance. However, an across-the-board discretionary loosening (including a long-planned 5 percentage point cut in social security premiums, a sizable increase in the real wage bill, and increased investment spending), unrelated to the downturn, was already underway when the crisis hit in late 2008. Subsequently, a package of targeted stimulus measures was adopted in early 2009 that included expanded short-time unemployment benefits and temporary tax cuts on purchases of cars and other durables, with the latter effective in boosting demand for these products.

Sources: Turki sh auth orities: and IMF staff estimates.1/ NFPS is the nonfinancial public sector.2/ GG is the general government.

12. As a result, public sector balance sheets deteriorated. The NFPS primary balance declined by 4 percentage points during 2007-09 to a deficit of 1 percent of GDP (although the 2009 outturn was considerably better than anticipated due in part to an unexpectedly strong growth recovery). The debt-to-GDP ratio rose by 6 percentage points to 45 percent (Appendix I). To moderate government funding costs, the share of floating rate debt was increased sharply (mostly inflation-linked bonds). As a result, interest rates on about 80 percent of lira debt will reset within 12 months.

Source: Turkish Treasury.1/ includes inflation-linked bonds.

13. Since mid-2009, fiscal policy has focused on exiting from stimulus. The widening spread between the cost of government borrowing and the policy rate raised concerns the rapidly growing deficit was weakening confidence and crowding out the nascent private sector credit recovery. In July 2009, excises on tobacco and petroleum were raised, yielding about 0.5 percent of GDP on a full-year basis, although it further skewed the tax burden toward indirect taxes. A Medium-Term Program (MTP), announced in September 2009, targets gradual fiscal consolidation over the next three years. The 2010 primary deficit target of 0.3 percent of GDP was supported by a zero real wage increase for civil servants, further hikes in already-high excises on petroleum and tobacco, increased healthcare copayments, and reduced payments to drug suppliers. However, an ad hoc increase in low pensions (costing 0.3 percent of GDP per annum) was granted at the beginning of 2010.

Debt and Deficit Targets in the September 2009 Medium-Term Program

(Percent of GDP, unless otherwise noted)

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Sources: Turkish authorites; and IMF staff calculations.

Monetary policy

14. With the prospect of subdued inflation and a rapidly widening output gap, monetary policy was eased aggressively, beginning in November 2008. The policy rate was cut by a cumulative 10¼ percentage points (10 percentage points in real terms). Lira and FX liquidity were expanded through various operations, including reductions in reserve requirements and extension of repo maturities to three months, making the CBT a large net supplier of liquidity. Turkey’s real policy rate is now low given the position in the cycle, even after adjusting for one-off excise increases.

Source: CBT.1/ Calculated as the net liquidity injection implied by the December, 2008, October 2009, and April 2010 changes in the reserve requirement ratios.
Sources: Turkstat IMF. World Economic Outlook; and IMF staff estimates.1/ Other emerging markets under inflation targeting. The band dentotes a one-standard deviation band around the median value on this sample of inflation targeters.

15. By supporting banks’ balance sheets, monetary loosening facilitated renewed credit growth once lending standards eased. Cuts in the policy rate were transmitted to market rates, but at speeds and pass-through rates that varied across instruments. Rates on corporate lending declined the most, by more than 15 percentage points. However, increased risk aversion and a drop in credit demand initially constrained new lending. In the interim, monetary policy relaxation accommodated fiscal expansion by increasing banks’ appetite for government debt. Widening interest margins (especially on consumer credit), together with recovering domestic demand and easing lending standards in the second half of 2009, helped revive credit supply—initially by state banks—which accelerated further to an annualized rate of around 30 percent in the first 5 months of 2010.

Sources: CBT: and BRSA.1/ The increase in May 2010 correspcnds to the switch from the CBT overnight borowing rate to the 7-day repo as the policy rate.2/ 12-month credit growth ofthe consolidated banking sector (both onshore and offshore branches)to the nonfinancial private sector.3/ Defined as the difference between the percentage of banks that have eased andtightened credit standards.

Financial sector policies

16. Amendments to prudential regulations aimed to preserve banks’ high capital adequacy ratios while encouraging lending. Measures included regulatory approval prior to payout of bank dividends, a one-time reclassification of banks’ holdings of government securities to the investment account, temporary easing of conditions for restructuring loans, and temporary elimination of general provisioning for new loans. The rescission of the ban on some onshore FX lending to unhedged corporates should, on a consolidated basis, have minimal effect on banks’ related exposures, whereas the permanent ban on FX-indexed lending to households should reduce this source of indirect FX exposure (text table and Box 3).

Main Measures Affecting the Financial Sector Prudential Framework

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Sources: Turkish authorities; and IMF staff.

D. Political Setting

17. The political calendar is expected to be quite full over the next two years. Parliamentary elections are due by mid-2011. The ruling Justice and Development (AK) Party has been in power since 2002. A constitutional reform package was recently approved by Parliament and goes to referendum in mid-September. A presidential election, for the first time by direct popular vote, is due in 2012.

II. Report on the Discussions

A. Macroeconomic Outlook and Risks

18. There was agreement that growth would be strong in the near term, with a wider current account deficit and above target inflation. For 2010, strong carryover from a depressed base and robust within-year momentum were expected to propel GDP growth to 6-7 percent. This would be underpinned by private consumption—on account of low real interest rates—restocking, and, to a lesser extent, exports. The current account deficit was expected to widen sharply to close to 5 percent of GDP reflecting mostly the growth recovery, despite a solid increase in export demand. Inflation was projected to be well above the mid-point of the target band at the end of the year. From 2011, annual growth was expected to moderate as favorable base effects dissipate, but with continuing quarter-on-quarter domestic-led growth. Inflation was expected to subside, but the current account deficit was seen as gradually increasing, with external debt rising to more than 50 percent of GDP in 2015. Nonetheless, with only modest remaining exposure to the Fund (SDR 5 billion outstanding), capacity to repay was not seen as a concern (Appendix I).

19. Risks to near-term growth were seen as broadly balanced, with the unsettled situation in Europe posing a two-way hazard (Appendix II). Weaker-than-projected export demand from Europe (from slower activity and a more depreciated euro), less funding from EU banks, or a generalized increase in risk aversion may deflate domestic and external demand. Looking forward, in the event of domestic political uncertainty, confidence may also weaken. However, the authorities also noted that Turkey’s relatively strong fundamentals and sound policy framework—soon to be supplemented by a fiscal rule—help differentiate Turkey from its regional emerging market peers and may attract larger capital inflows that would boost growth.

20. Views on longer-term growth prospects were mixed. The authorities considered that following a temporary dip caused by the recent drop in investment and factor productivity growth, potential growth could reach 5 percent in the medium term provided adequate stable long-term capital inflows were secured to finance investment and technology transfer. The mission expected growth in the medium term to be around 4 percent (average growth over the last decade was 3.7 percent), supported on the one hand by sound balance sheets and potential for income convergence, but restrained by weak external competitiveness and labor market inefficiencies. Removing these obstacles could therefore improve medium-term growth prospects.

B. Current Account Deficit, Competitiveness, and External Stability

21. Officials attributed the high correlation between growth and the current account deficit to structural factors. They saw the cross-border nature of vertically-integrated production, dependence on imported energy, and a low saving rate brought by the large share of below-working-age population as supporting a relatively high level of the current account deficit. Relative prices were seen as playing a modest role, consistent with results of a survey on the reasons firms demand imported intermediate goods which found that, on average, respondents assigned a 20 percent weight to cost factors and an 80 percent weight to structural factors that are less likely to respond to changes in the real exchange rate (e.g., lack of or limited domestic supply, vertically integrated production structure of multinational firms, and credits provided from abroad). The survey also found that the cost of intermediate inputs is not only related to the exchange rate, but also to the foreign trade regime (e.g., the inward processing regime implemented to promote exports and the customs union).4 They noted that, given the trend nature of the CPI-based real exchange rate, it was therefore not surprising it was nearing its historical peak, but that 2½-3 percentage points of the annual increase reflected productivity enhancements in the tradable sector that entail no loss of labor cost-based competitiveness (Balassa-Samuelson effect). Moreover, attempting to depress the nominal value of the lira (while not seen as a feasible strategy—see below) would, in any event, fail to durably improve competitiveness given high pass-through to wages and prices. Increasing participation in individual retirement plans and the gradual increase underway in retirement ages were seen as raising the saving rate.5

22. The mission saw inadequate competitiveness as an important contributor to the high import elasticity of growth. The cyclical sensitivity of imports is apparent from the faster growth of imports than domestic demand and GDP during the pre-crisis boom, and from the much sharper import drop during the downturn. The mission noted the survey responses could be interpreted as suggesting locally-sourced products had been forced out of (or had never entered) the market because they could not compete, causing firms to rely heavily on imported intermediates and depressing domestic value-added in final production. Moreover, growth in consumption had also become more skewed toward imports at the same time the real exchange rate had been appreciating. Regarding energy dependence, while structural reforms are needed to moderate demand for imported energy (see below), in the interim, competitiveness should be strengthened to generate sufficient export earnings to cover the cost of energy imports and avoid excessive external debt.6 Staff sees Turkey’s current account deficit norm at around 2½ percent of GDP, consistent with a considerable competitiveness gap (Box 4).

External Competitiveness

From several perspectives, Turkey is experiencing a considerable competitiveness gap:

  • Based on CGER-type assessments, staff estimates that Turkey has a considerable competitiveness gap, based on the results of the three standard methodologies. The current account norm (-2.4 percent of GDP) reflects mainly Turkey’s low old-age dependency ratio (supporting a high saving rate), but that is partially offset by a sizable per-capita income differential and fast-growing population (pushing up investment and lowering saving).

  • REER price-based indices increased considerably in recent months owing to nominal appreciation and persistent inflation differentials. Both the CPI- and PPI-based REERs rose by about 9 percent during December 2009-June 2010, approaching their historical peaks.

  • The ULC-based REER index dropped by about one-third during mid-2008 to Q1 2010, deviating from its previous tendency to co-move with price-based REERs and signaling a significant improvement in labor competitiveness, although the current level remains 12 percent above the 2003 level.1/ Given recent increases in employment and the rising minimum wage, the decline in the ULC REER suggests that (consistent with reports heard by the mission) since the onset of the crisis, firms have shifted part of their workforce—or part of the activities of individual workers—to the informal sector in order to save on labor costs and increase employment flexibility. There is, however, a limit to the future savings that can be obtained through this strategy.

  • The market share of Turkey’s exports in major advanced country imports has been stagnant in recent years. Moreover, recent declines in penetration of emerging market and fuel exporters’ markets have started to reverse the significant gains of earlier years.

  • While export growth has been fairly rapid during the pre- and post-crisis periods (which may be suggestive of strong competitiveness), the import content of domestic demand and exports has risen steadily, implying a declining domestic content in products destined to satisfy domestic and external demand. This reflects in part the assembly-type nature of Turkey’s rapidly expanding sectors, including transport vehicles. As a result of the low domestic content, these industries may be footloose and, as experience in Central and Eastern Europe shows, willing to uproot to more competitive countries.

Sources: CBT; Turkstat; IMF: Direction of Trade Statistics; and IMF staff estimates.
1/ The ULC REER data was first published by the CBT in July 2010.

23. With growth resuming, the Turkish economy has reverted to its pre-crisis unbalanced path, even as global and domestic uncertainties have resurfaced. A small fraction of the global flood of liquidity is making its way to Turkey, fuelling credit, boosting consumption and investment, and financing imports. The mission noted that while fewer inflows would reduce the current account deficit, with growth dependent on imports, this would severely depress activity. Therefore, low reserve cover and the shorter duration of capital inflows constitute important risks to the stability of financing and GDP. In addition, persistent inflation differentials may promote a cycle of real overvaluation and even greater import dependence that would eventually drag down growth. Typically, such cycles do not unwind gradually, and the external financing needed to sustain them—particularly if short term—will be sensitive to risk perceptions. To ameliorate these concerns, the mission urged decisive action to strengthen competitiveness.

C. Policies

24. The policy discussions focused on ways to enhance growth performance and reduce vulnerabilities. The authorities emphasized the appropriate timing and pace at which to withdraw policy stimulus, including through implementation of the new fiscal rule. The mission advocated countercyclical macro policies to contain the current account deficit and inflation, together with structural reforms to improve competitiveness and reduce dependence on imports. A policy mix that emphasizes early fiscal adjustment was seen as moderating the need for monetary tightening that, in the presence of large, interest-sensitive capital flows, could otherwise compromise the external objective.

Fiscal policy

25. With the authorities expected to review their fiscal targets in the coming weeks, the mission urged avoiding a procyclical policy stance in 2010. Staff expected revenue to overperform considerably because: (i) the 2009 revenue outturn was 0.9 percent of GDP higher than assumed in the 2010 budget; and (ii) 2010 nominal GDP growth is projected to be 6 percent higher than budgeted. Staff urged the authorities to save revenue overperformance by adhering closely to budgeted spending levels and maintaining current tax and formula-based energy pricing policies.7 Under staffs revenue projection, this would improve the primary balance to at least 0.6 percent of GDP (compared to the current target of -0.3) and ensure a sizable structural improvement. Such an approach would help contain the current account deficit and inflation pressures, while limiting private sector crowding out, promoting the new fiscal rule’s success by reducing required adjustment in 2011 (see below), and reinforcing Turkey’s fiscal discipline credentials. Given heightened global uncertainties and a desire for prudent forecasting, the authorities indicated they do not intend to revise up significantly their revenue projections and did not indicate how a substantial revenue overrun—should it arrive—might be deployed.

Selected Fiscal Variables, 2008-10

(Percent of GDP, unless otherwise noted)

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Sources: Turkish authorites; and IMF staff calculations.

Numbers in the authorities’ September 2009 Medium-Term Plan (MTP). Cyclically adjusted balances are imputed by staff.

Assumes the authorities maintain the 2010 primary surplus target in the MTP of -0.3 percent of GDP (under staff’s macro which assumes higher-than-budgeted growth and revenue).

Assumes the authorities stick to budgeted limits for discretionary spending in 2010 and save all revenue overperformance above inflation adjustments to pension and wages, obligatory local government transfers, and the Jan. pension increase.

Percent of potential GDP. Cyclical adjustments are made using staff’s assumptions for potential growth and the cyclical sensitivity of the primary balance.

Fiscal effort is defined as the change in the cyclically adjusted primary balance.

26. From 2011, the government will apply a deficit-based fiscal rule, which it viewed as a major addition to Turkey’s institutional framework—on a par with central bank independence and inflation targeting.8 The proposed rule requires (allows) a specific amount of tightening (loosening) each year in proportion to how far the overall deficit is above (below) the medium-term target (set at 1 percent of GDP) and GDP growth is in excess (falls short) of its average long-term real growth rate (set at 5 percent) (see Appendix III). The rule binds the general government, with a separate balanced budget requirement for the state enterprise sector. Accompanying improvements to public financial management procedures include more transparent and comprehensive reporting of fiscal projections and outturns, some tightening of oversight over local government borrowing, and elimination of some loopholes to deliver spending outturns more in line with the target.

27. Staff agreed the rule provides a prudent anchor, but urged further reforms to underpin implementation. With the parameters chosen by the authorities, the deficit and debt are expected to moderate under a wide range of scenarios notwithstanding that, with a value of 5 percent, the average long-term real growth rate exceeds staff’s estimate of medium-term growth.9 Regarding 2011, if—as recommended—most 2010 revenue overperformance is saved, no additional fiscal adjustment would be needed to meet the 2011 target, but if overperformance is not saved, 0.3 percent of GDP of new measures would be required (Box 5).10 However, with the rule setting only a ceiling on the deficit, consideration should be given to doing better than the rule to address current account and inflation concerns while relieving the burden on monetary policy. Further improvements to the implementing framework are needed to safeguard the target, including mechanisms to ensure timely implementation of within-year corrective measures, strengthen fiscal coordination between central and local governments, and encourage conservative budget forecasts. However, strength of commitment will ultimately determine the success of the rule.

28. The authorities recognized the fiscal rule was not a substitute for needed structural reforms. The authorities reported that tax administration was being strengthened by increasing the number of auditors and through pending legislation to institute mechanisms to promote more uniform and transparent tax opinions. Staff noted that the Revenue Administration would also benefit from increased budget flexibility and urged that these enhanced capacities be used to increase scrutiny of wage reporting in conjunction with the Social Security Institution, while ensuring continued improvements in audit procedures and evenhandedness across all tax payers to promote better voluntary tax compliance. In addition, the mission urged continued implementation of measures to control healthcare, wage, and pension expenditure. Indeed, restraining public sector wage growth could also help moderate private sector wages. Staff regretted the ad hoc pension increase in January 2010 that breached the CPI indexation principle established in the 2008 social security reform and essential to support pension system sustainability. The authorities confirmed they intend to apply only CPI indexation for the semi-annual July 2010 increase.

Monetary and exchange rate policies

29. The CBT views its post-crisis exit strategy, which focuses on normalizing liquidity conditions, as distinct from short-term interest rates decisions taken to bring inflation into line with medium-term inflation targets. With the CBT’s daily FX purchases providing a stable supply of lira liquidity and reduced risk of liquidity disruptions, the CBT intends to gradually withdraw the exceptional liquidity support it supplied during the crisis. The pace of withdrawal will be determined flexibly in response to market conditions, including possible spillovers from external events. Initial steps have been taken, with a modest reduction in the amount of short-term repo funding and a small increase in the FX reserve ratio and, as a result, market interest rates have begun to pick up slightly. Further adjustments in reserve requirements will be implemented if credit growth is excessive and a risk to macroeconomic stability.

Near-Term Implications of the Fiscal Rule

How fiscal policy is implemented in 2010 and how the rule’s ceiling is treated will affect the fiscal paths:

  • If the current fiscal target for 2010 (-0.3 percent of GDP) is maintained, reducing the general government overall deficit from around 4¼ percent of GDP in 2010 to 2¾ percent of GDP by 2013 as dictated by the rule requires cumulative discretionary (“discretionary” because the rule automatically adjusts for the growth cycle) adjustment of 1.3 percent of GDP. This would reduce the general government debt ratio by about 2 percentage points.

  • If most revenue overperformance in 2010 is saved, deficit targets during 2010-13 would be lower and the debt reduction would be larger, but the needed cumulative discretionary adjustment during 2011-13 would be limited to 0.5 percent of GDP.

  • With the rule only setting a ceiling on the deficit, fiscal policy is permitted to be tighter than the rule. This may be warranted if economic conditions prevail that are not captured by the rule (such as financing constraints or current account considerations). In any event, good practice suggests the ceiling should be treated as a “third rail” that is typically overperformed. Doing so requires prudent budgeting and adequate buffers to ensure the rule is met under most contingencies. If such mechanisms lead to overperformance against the rule by 0.3 percent of GDP per year on average and if revenue overperformance in 2010 is saved, the discretionary adjustment required during 2011-13 would still be smaller than in the baseline, but with much faster debt and deficit reduction.


General Government Debt, Deficit, and Adjustment Paths Under Possible Fiscal Rule and Different Policies

(Percent of GDP)

Citation: IMF Staff Country Reports 2010, 278; 10.5089/9781455206858.002.A002

Sources: Turkish authorities; and IMF staff estimates.1/Assumesthat prudent budgeting (to ensure the rule is met) results in average overperformance againstthe rule of 0.3 percent of GDP peryear.

30. With inflation expectations above-target amid strong credit and domestic demand growth, the CBT intends to initiate a limited tightening of monetary policy to gradually bring inflation back to target. The CBT expects the recent spike in inflation to moderate as temporary factors dissipate and some product market rigidities are relaxed. Nonetheless, with domestic demand growing more rapidly than external demand and the output gap in the nontradables sector nearly closed, the CBT expects to increase policy interest rates beginning in the last quarter of 2010, with the timing and magnitude dependent on domestic and international developments.11 CBT officials viewed credit as the main transmission channel for monetary policy, with an increase in the policy interest rate moderating demand for new loans and, hence, demand for locally-made products. As a result, nontradables inflation would be dampened, but leaving the nominal exchange rate and capital flows little affected. While tightening would also be consistent with the CBT’s financial stability mandate, monetary policy officials saw potential for more restrictive fiscal and macroprudential policies to moderate domestic demand, thereby limiting the need to raise policy interest rates. Going forward, they saw the fiscal rule as improving the predictability of monetary policy.

31. The mission considered that a more accelerated reversal of monetary stimulus was warranted under its baseline. Policies are needed to moderate credit growth to further dampen inflation expectations and keep the current account deficit in check. This task is made more difficult by surplus global liquidity and low interest rates in the advanced economies. But delaying may necessitate an even sharper response that creates further complications by attracting large short-term inflows and hurting banks because of their maturity mismatches. Therefore, a broad-based monetary tightening—through reversal of CBT liquidity support and a series of small increases in the policy rate—should be brought forward. An even faster monetary tightening would be needed if the required fiscal adjustment on a cyclically-adjusted basis is not forthcoming. However, in the event global growth appears sets to slow sharply (which—consistent with the WEO—is not staff’s current baseline), there was agreement that monetary tightening could be halted and possibly reversed.

32. Parties agreed on the need to further accumulate reserves, but opinions differed on whether to step up the amount of regular pre-announced FX purchases. The mission noted that with the duration of debt becoming shorter, reserve cover of short-term debt would recover only slowly under current auction amounts. Therefore, should capital inflows remain stable or strengthen, the amount of daily preannounced FX purchases—within the current floating exchange rate regime—could be increased modestly (but keeping the amount small relative to daily interbank FX turnover) to more quickly accumulate reserves, as well as lean against a compression of tradables prices that would further push demand toward imports. However, the CBT was wary of this strategy unless accompanied by larger, more stable, inflows. Moreover, they doubted whether this would deliver a weaker lira since stepping up significantly the amount of reserves would boost confidence and attract more inflows that would tend to make the currency a one-way bet, particularly if the purchases were sterilized.

Financial sector policies

33. Better coherence between monetary and financial sector policies could be achieved by quickly phasing out relaxed regulations on general provisioning and classification of restructured loans. The authorities saw maintaining these measures until 2011 as necessary to encourage banks to roll over existing loans. The mission is of the view that while temporary easing of prudential norms may have been appropriate in the midst of the crisis to discourage panic responses, recent extensions and broadening are unwarranted amid rapid credit growth. Moreover, relaxation of prudential regulations obscures assessment of asset quality and understates NPL ratios, which may also be supported by temporarily low real interest rates. It also weakens sound risk management practices by banks that are essential to avoiding a deterioration in fundamentals as lending is expanded to offset the impact of falling interest margins on profits.

34. Several other recent and prospective changes to Turkey’s prudential framework were discussed:

  • Credit card debt: In view of the high NPL rate on credit card debt (about 10 percent), the mission endorsed the proposal to disallow increases in credit limits if the cardholder is unable to consistently make on-time payments of the monthly minimum balance due.

  • FX lending: The mission welcomed the 2009 prohibition on FX-indexed lending to households. They noted that lifting the restriction on onshore unhedged large-volume lending in FX may only represent a shift from offshore branches, but cautioned that lending in FX to unhedged firms—even prominent companies—is risky given global uncertainties and the prevailing competitiveness gap. The mission advocated assigning higher-than-standard risk weights on FX loans to unhedged businesses and requiring banks to report to the BRSA the volume of such lending and associated loan performance on a monthly basis.

  • Banks’ issuance of lira-denominated bonds: While the BRSA’s recent refusal of banks’ request to issue lira bonds helps limit banks’ reliance on possibly volatile wholesale funding, it also hampers their ability to reduce their maturity mismatch and discourages longer-term lending. The mission therefore supported the BRSA’s intention to reconsider this ban once uncertainty in Europe abates. They cautioned, however, that with much of this new funding expected to be funneled to mortgage lending—thereby making such credit accessible to a new class of borrower—the BRSA should closely oversee banks’ internal assessments of this category of credit risk and ensure appropriate norms are applied on borrowers’ debt servicing capacity, complementing existing protections.12

  • Too big to fail: While Turkey’s banking sector is not especially concentrated (the three largest private banks account for around 40 percent of sector assets and the largest bank is state owned), the authorities were keen to address possible risks from concentration, drawing on the ongoing international dialogue on systemically important financial institutions. The mission advised that policies be calibrated to Turkey’s specific circumstances and phased in gradually to limit possible disruptions in the financial system.

35. Important aspects of a sound framework for financial sector supervision, contingency planning, and crisis management are in place, but some additional measures are recommended. With increased regional financial stability risks, bank-by-bank data on lira and FX liquidity requirements are collected daily and interactions with European supervisors have increased. Domestically, cooperation and exchange of information between relevant government and supervisory institutions have also been stepped up. Further improvements should be made by: (i) incorporating into stress tests the indirect effects of market risk on banks’ credit portfolios to provide a more accurate assessment of banks’ resilience, while also employing more complex scenarios (such as possible direct and indirect implications of unsettled international financial markets); (ii) better collecting and monitoring of data on unlisted companies—which comprise the vast majority of the business sector and account for a large share of direct foreign borrowing—to help identify systemic vulnerabilities in a timely manner; and (iii) implementing regulatory and legislative changes to expedite resolution of failed banks—a key recommendation of the 2007 FSAP (Appendix IV). The authorities have requested an FSAP update for 2011.

Structural reforms

36. The authorities viewed rapid economic growth, combined with lower labor taxes, as essential to creating employment. Policies instituted to encourage job creation include a permanent 5 percentage point cut in employers’ social security premiums and increased funding for active labor market policies. However, permanently reducing unemployment was seen to depend on sustaining high GDP growth rates and, over the longer term, better tailoring education to employers’ needs.

37. The mission interpreted the downward rigidity of unemployment as indicative of inefficiencies in the labor market and urged actions to promote job-rich growth and enhance competitiveness. Turkey’s high minimum wage, generous severance pay scheme, and tight restrictions on temporary employment contribute to the low domestic content of production by encouraging firms to substitute imported capital and intermediate goods for labor and domestically sourced inputs. To promote job creation in the formal sector and enhance competitiveness of exporters—which are more likely than other firms to operate in the formal sector—formal sector labor costs and regulations should be reduced to better align them with practices in comparable EU and OECD countries, accompanied by efforts to shrink the shadow economy. This would avoid a drop in tax collections that may result from minimum wage restraint (since many workers declare only the minimum wage rather than their true income), and a permanent improvement in tax compliance could support a revenue-neutral cut in labor and other taxes borne by producers.

38. Structural policies could also narrow the current account deficit by increasing fiscal savings to be used for competitiveness-enhancing tax cuts or deficit reduction beyond that required by the fiscal rule. Accelerating the phase-in of higher retirement ages (currently, many individuals start receiving social security pensions in their late 40s) would reduce pension spending and increase formality by delaying the transition from employment in the formal sector to working as a pensioner in the shadow economy. Sustained and uniform application of energy pass-through pricing formulas would also narrow the current account deficit by increasing fiscal savings and reducing dependence on imported energy.

III. Staff Appraisal

39. Far-reaching reforms and solid macroeconomic policies instituted in the aftermath of Turkey’s 2000-01 crisis paid invaluable dividends during the recent global financial crisis. Persistent fiscal primary surpluses, conservative monetary policy in the context of inflation targeting, and overhaul of banking supervision and regulation helped contain pre-crisis vulnerabilities relative to other countries in the region. Healthy balance sheets of banks and households, supported by the reflow of international capital and the authorities’ decisive policy response made possible by the previously prudent stance of policies, prompted an early and robust credit-led rebound.

40. Sustaining the recovery while limiting external imbalances requires bringing forward the exit from crisis-related stimulus and implementing reforms to moderate import dependence. Policies should restrain domestic demand and lower the cost of formal sector employment. With relaxed monetary policy in advanced countries creating a large pool of interest-sensitive capital flows and with inflation pressures moderating at home, emphasis should be on structural reforms, fiscal restraint, and macro-prudential policies. Indeed, if Turkey’s recovery falters due, for example, to increased risk aversion or weaker global demand, halting or even reversing the monetary tightening would be appropriate, but structural reforms and fiscal consolidation on a cyclically adjusted basis should continue to maintain confidence in external and fiscal sustainability.

41. Further unwinding the recent fiscal stimulus is needed to contain domestic demand and promote fiscal sustainability. For 2010, saving revenue overperformance in excess of mandatory spending increases while maintaining existing tax policies and the energy pricing formula is warranted to avoid procyclicality and promote domestic saving. It would also limit the need to sharply tighten monetary policy, promote successful implementation of the fiscal rule in 2011—its inaugural year—by reducing the required adjustment next year, more quickly moderate public debt, and signal the government’s commitment to avoid pre-election spending.

42. The new fiscal rule is an important addition to Turkey’s policy framework, but fully realizing its disciplining role requires continuous political commitment and adequate supporting savings. The rule’s formulation, choice of parameters, and comprehensiveness of institutional coverage will together establish prudent, feasible, and appropriately countercyclical deficit ceilings. Envisaged improvements in transparency and elimination of spending loopholes are welcome. However, the framework should be further strengthened by ensuring prudent forecasts, timely implementation of within-year corrective measures, and improved coordination within general government. With only reputational sanctions, strong political backing and sufficient measures will be essential to sustain the rule. Evenhanded strengthening of tax administration and containment of spending pressures, including through a possible accelerated phase-in of higher retirement ages, will therefore be needed.

43. Bringing forward a moderate tightening of monetary conditions could obviate the need for a sharper and larger tightening later on. A delayed tightening could be counterproductive by attracting sizable capital inflows and be detrimental to banks because of their maturity mismatch. Tightening should be broad based with the aim of raising real borrowing costs and moderating inflation expectations. Greater recourse to contractionary monetary policy—with its attendant risks—would be needed if the appropriate fiscal adjustment is not forthcoming.

44. Modestly increasing regular FX purchases would accelerate reserve buildup at a time when the quality of external financing has declined. This would not compromise the freely flexible exchange rate—which staff strongly endorses—under the inflation targeting framework or create expectations of one-way currency movements. It could, however, give support to external competitiveness by leaning against the wind of lira appreciation.

45. Financial sector forbearance measures should be quickly phased out and macroprudential tools strengthened. With credit growing at a rapid clip, relaxed regulations on loan classification and provisioning are unnecessary and could impede an accurate assessment of credit quality and encourage imprudent lending decisions. Future risks should be averted by tightening regulations on credit card debt limits, increasing risk weights on lending in foreign currency to unhedged firms, and ensuring banks apply sound debt service limits on mortgage borrowers. Doing so would also enhance coordination with, and strengthen the effectiveness of, monetary policy.

46. Further improvements in supervision and crisis management are needed, while changes in regulations may be warranted to reflect initiatives at the international level. Stress tests should be updated to better reflect the indirect impact of market risk and utilize more realistic shock scenarios. Capacity to respond to bank distress, including the legal authority to resolve a troubled bank, should be strengthened. Any amendments to the regulatory framework to reduce the risk from systemically important institutions should be tailored to Turkey-specific conditions and introduced gradually to avoid unnecessary dislocation.

47. Reducing dependence on external savings requires rebuilding competitiveness and moderating demand for energy imports. Better aligning Turkey’s productivity-adjusted employment costs with those of regional peers would foster formal-sector jobs and reduce the import content of production. Doing so requires lowering the minimum wage (especially in low-income regions), scaling back severance benefits, and allowing more flexible work practices. This approach would be more effective and less distortive than the current practice of selective tax breaks. Realigning the minimum wage should be accompanied by better tax enforcement to avoid a drop in revenue on account of the high proportion of tax filers who declare the minimum wage. A permanent increase in tax revenue would also facilitate a revenue-neutral cut in labor and other business taxes. Sustained, uniform application of the energy cost pass-through pricing formula would promote conservation and investment in more efficient generation capacity and in renewables, thereby moderating demand for imported energy.

48. It is recommended that the next Article IV Consultation with Turkey be held on the standard 12-month cycle.

Table 1.

Turkey: Selected Economic Indicators, 2005-11

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Sources: Turkish authorities: and IMF staff estimates and projections.

Fiscal projections assume the authorities adhere to their budget target for 2010 and implement the fiscal rule in 2011.

Nonfinancial public sector net debt.

The external debt ratio is calculated by dividing external debt numbers in U.S. dollars based on official Treasury figures by GDP in U.S. dollars calculated by staff using the average exchange rate (consolidated from daily data published by the CBT).

GDP in U.S. dollars is derived using the average exchange rate (consolidated from daily data published by the CBT).

Table 2.

Turkey: Balance of Payments, 2007-15

(Billions af U.S. dollars)

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Sources: Turkish authorities; and IMF staff estimates and projections.

Including privatization receipts.

Volumes based an World Economic Outlook deflators.

Changes in stacks may not equal balance af payments flaws due ta valuation effects af exchange rate changes.

The external debt ratio is calculated by dividing external debt numbers in U.S. dollars based an official Treasury figures by GDP in U.S. dollars calculated by staff using the average exchange rate (consolidated from daily data published by the CBT).

Interest plus medium- and long-term debt repayments in percent of current account receipts (excluding official transfers).

Table 3.

Turkey: External Financing Requirements and Sources, 2007-15

(Billions of U.S. dollars)

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Sources: Turkish authorities; and IMF staff estimates and projections.

Includes Central Bank of Turkey (excludes IMF purchases and repurchases).

Series reflects stock of short term trade credits at end of previous year.

Portfolio equity and domestic government debt (net).

Errors and omissions and other liabilities.