Turkey: Selected Issues

This Selected Issues paper on Turkey discusses the new monetary framework adopted by the Central Bank of Republic of Turkey (CBRT). Instead of relying on one interest rate as inflation-targeting, the CBRT resorted to raising it as inflation pressures intensify and lowering it as they abate. The first version of the framework does not seem to have achieved significant reduction in external and internal imbalances, but the second version of the framework has witnessed an unwinding of imbalances.


This Selected Issues paper on Turkey discusses the new monetary framework adopted by the Central Bank of Republic of Turkey (CBRT). Instead of relying on one interest rate as inflation-targeting, the CBRT resorted to raising it as inflation pressures intensify and lowering it as they abate. The first version of the framework does not seem to have achieved significant reduction in external and internal imbalances, but the second version of the framework has witnessed an unwinding of imbalances.

IV. Boosting Savings In Turkey1

Turkey’s saving rate has fallen dramatically over the last fifteen years, the largest decline of any G-20 country. The decline was concentrated in the private sector, with public savings actually increasing over the period. Low domestic savings have left the country very dependent on volatile foreign capital to finance investment, and hence prone to boom-bust cycles. Raising savings is thus a key medium term objective. In addition to the recent reform of private pensions, achieving this objective will require an improvement in the structural fiscal balance, increases in mandatory savings via the pay-as-you-go pension system, and continued efforts to tackle informality and boost the female labor participation rate.

A. The Issues

What happened to savings in Turkey?

1. Turkey’s national saving rate has fallen dramatically over the last 15 years, from some 25 percent of GDP in the late 1990s to less than 15 percent of GDP now. Most of the decline occurred before 2003. Modest gains over the last two years are encouraging, but they have yet to make up for the loss in savings in the aftermath of the global financial crisis.


National Savings Rate

(Percent of GDP)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Source: Ministry of Development.

2. The decline in national savings is striking by international standards. Looking at the last twenty years, Turkey has had the largest decline in savings of any G-20 country. The decline has been larger than in advanced economies which have, like Turkey, suffered from higher commodity prices, but which have not enjoyed the doubling of income levels—and the boost in savings it carries—that Turkey did. And while the terms of trade can explain why some peer emerging economies have experienced an increase in savings over the period, it is noteworthy that several emerging economies that are not big commodity producers have not seen anything like Turkey’s savings decline. In Poland, savings have been remarkably flat over the last fifteen years. In India, savings have declined in recent years but only after a very sharp increase earlier on, so that savings are now significantly higher than in the late 1990s. In these two countries, saving levels are well above those in Turkey, by close to 5 percentage points of GDP in Poland, and 15 percentage points of GDP in India.


G-20: Change in National Savings Rate

(change between 1998 and 2011, ppts of GDP)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Source: WEO, and IMF staff calculations.

Saving Rates in Peer Countries

(percent of GDP)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Source: WEO; and IMF staff calculations.

3. The decline in Turkish savings has been concentrated in the private sector…Since the late 1990’s, a decline in private savings of 15 percentage points of GDP has more than accounted for the decline in total savings. Moreover, unlike aggregate savings which have been roughly flat since 2003, private savings have declined almost continuously since the 2001 crisis and subsequent recovery, with a close to 5 percentage points of GDP decline in the last three years alone.


Private Savings Rate

(percent of GDP)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Source: Ministry of Development

Household Savings 1/

(percent of disposable income)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

1/ The expanded definition includes consumption of durables as savings.Source: World Bank; and IMF staff calculations.

4. …and mostly among households rather than corporates. There are no national accounts estimates of household and corporate savings, which are then measured on the basis of household and corporate surveys (the latter might be less statistically representative than the former, as they often exclude a significant portion of SMEs). Moreover, these measures tend to express savings as percent of household disposable income or as percent of corporate sales, and these are not directly mappable to GDP. Still, as the World Bank (2012) makes clear, available evidence suggests that corporate profitability in Turkey recovered after the 2001 crisis and is now comparable to late 1990’s levels. On the other hand, both mean and median household savings did decline over the last decade, though interestingly the decline was much less pronounced if one includes purchases of durables as part of savings.2

Why did private savings fall?

5. The literature has found a consistent set of indicators that explains the decline in savings. Several studies including inter alia IMF (2007), van Rijckeghem (2010), World Bank (2012), Matur et al. (2012) have looked econometrically at the savings decline and have converged to a consistent set of explanatory variables, which relate directly to the radical transformation of the Turkish economy following the successful stabilization in the early 2000s. More specifically, these studies found that savings declined for the following main reasons:3


Public vs. Private Savings

(percent of GDP)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Source: Ministry of Development.
  • higher public savings: over the last ten years, public and private savings have been almost perfect mirror images of each other, with the 8 percent of GDP cumulative increase in public savings offset by the decline in private savings.4 Not surprisingly, the offset between the two has been stronger than in other peer countries. This, however, should not be seen as unambiguous evidence of Ricardian equivalence, as the link between public and private savings could have been indirect and episode-specific (credible fiscal consolidation in the early 2000’s created macro-financial conditions that led to lower savings—see below), rather than reflecting economic agents piercing the veil of intertemporal public finances. In addition, exogenous factors may have simultaneously affected public and private savings in opposite directions.5 At any rate, econometric estimates of the Ricardian offset for Turkey that control for other variables lie between 0.4 and 0.8, high but not unity.6

  • greater macroeconomic stability: with greater economic stability (proxied by the inflation rate, which has fallen sharply over the last decade), households felt less need for precautionary savings. Political stability, not captured in the studies, has certaintly been an important part of the mix as well.

  • greater access to credit: the stabilization of the Turkish banking system opened the door for credit to expand7, softening households and corporates’ liquidity constraints, again reducing the need for precautionary savings, and allowing agents to better smooth consumption over time.

  • finally, lower real interest rates, expanded coverage of the social security system, and demographic factors played some role in the savings decline.8

6. At the same time, it is important from a diagnostic and policy perspective to recognize those reasons that could have but did not contribute to the decline in savings. In Turkey, savings did not decline because of changes to the tax system that might have disincentivized them; in fact, the country relies proportionately little on income taxes, while consumption taxes represent a very large share of tax revenues. Similarly, while there is always room to improve the functioning of financial markets and expand the range of financial instruments for savings, there is no financial repression to speak of that could be distorting savings decisions.

Why do low savings matter?

7. Low savings are a key reason behind the country’s economic booms and busts. Historically, Turkey’s investment rate has averaged around 20 percent of GDP, in line with rates in many comparable countries. This is significantly higher than the savings rate, which has been at or below 15 percent of GDP for much of the last decade. In other words, the economy as a whole is “credit constrained” so that when capital inflows are ample, investment expands rapidly and the current account deteriorates9; in reverse, when external financing becomes scarce, investment and the current account deficit have to retract rapidly. The resulting investment booms and busts, directly tied to the capital flows cycle, are the key driver of output volatility in Turkey, with the implication that raising savings would be a good way to tame this volatility. It is worth noting that investment volatility is significantly higher in Turkey than in many peer countries with similar average investment rates but, not surprisingly, higher savings.


GDP Growth and Net Capital Inflows 1/

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Sources: Central Bank of Turkey; and IMF staff calculations.1/ Includes errors and omissions.

Investment Rates

(percent of GDP)

Citation: IMF Staff Country Reports 2012, 339; 10.5089/9781475586572.002.A004

Source: WEO.

8. Beyond output volatility, higher savings will be needed to realize Turkey’s medium-term potential. Fully tapping into the opportunities offered by the country’s young population, strategic location, and very low female labor force participation could require higher investment rates than at present. Some like Rodrik (2012) have even suggested a “target” investment rate of 28 percent of GDP, about 3–4 percentage points higher than the already high (by Turkish standards) 2011 rate. There is simply no way that this target can be sustained given current savings rates, for it would imply running annual external deficits in excess of 12 percent of GDP. Higher savings could thus help Turkey achieve not only less volatile growth but higher growth as well.

B. Policy Options

The laissez faire approach

9. It would be tempting to believe that savings will increase on their own, with no need for policy action. There are three arguments in support of this view. The first is that the sustained gains in terms of stability and policy credibility of the last ten years have created the conditions for durable growth, and that savings will increase as a result of this. After all, many countries that experienced growth take-offs also saw subsequent increases in their saving rates.10 The other argument is that the sharp increase in durables consumption in recent years, the result of higher incomes, improved confidence in the future, and greater availability of credit, will taper off soon once pent-up demand for these goods is satisfied.

10. Such complacency would be misguided however. It is not a given that the jump in durables consumption was a “one time thing,” as pent up demand can take many years to be satisfied and can ratchet up to higher-end goods as incomes rise. Similarly, savings need not automatically increase as incomes grow, and in fact they did not in the last decade when growth was very high in Turkey. It would also be prudent not to count on demographic trends to boost savings in the future: in Turkey, the projected decline in the youth dependency ratio (good for savings) will be accompanied by an increase in the old-age dependency ratio (bad for savings), so that the net result could be zero or only slightly positive (Van Rijckeghem, 2010).

So what can be done?

The government should be commended for reforming the voluntary private pension system. With private pension assets accounting for less than 2 percent of GDP, there is significant room for growth if the system can be made more attractive.11 The government recently replaced existing tax advantages with matching government contributions. This reform has tilted the incentives toward those with lower incomes and savings, and at the same time it has expanded coverage by including the many who do not pay taxes. In line with World Bank recommendations, the government also lengthened the vesting period and imposed penalties regarding the vesting of state matching contributions for early withdrawals, to keep people in the system. It is too early to tell whether the reform will be successful in generating new savings,12 but the changes go in the right direction.

11. However, more needs to be done, starting with higher public savings. Even if the underlying problem rests with too little private savings, this should not be taken to mean that the public sector has no role to play. After all, the structural primary fiscal balance, though significantly higher than ten years ago, remains some 2–3 percentage points of GDP below its pre-crisis levels. Bridging this gap would have two important benefits. First, with less than full Ricardian equivalence, it would help raise national savings, even if by a modest 1–1½ percentage points of GDP. Moreover, beyond this direct effect, there would be an indirect effect that could be quantitatively more important. A tighter fiscal policy would relieve pressure on monetary policy and, ceteris paribus¸ allow for a more depreciated real exchange rate. Of note, IMF (2007) found that REER overvaluation accounted for one fifth of the decline in private savings between 2001 and 2005, and staff believe the REER remains overvalued at present.

12. In addition to a higher structural public balance, the public pension system could be used to increase mandatory savings. This could be achieved, for example, by maintaining current contribution rates but reducing benefits. The difficulty of such a reform would be political, given that the last decade has already seen major changes to the pension system. Alternatively, the government could impose mandatory contributions to private pension accounts, but for this to succeed where similar plans failed in the past Turkey will need good oversight of the funds.

13. Finally, addressing informality and low female participation rate will be key, as these remain important obstacles to savings:

  • Tackling informality, which accounts for some 40 percent of the labor force: efforts to address the large informal sector, which have yielded gains in recent years, need to be sustained. Informal workers earn some 15-20 percent less than their counterparts in the formal labor market after controlling for observed individual characteristics (Başkaya and Hülagü, 2011), while their probability of losing their income is much higher. Both these factors negatively affect savings. Even within the formal system, tighter compliance would contribute to savings given the high share of the population that declare earning the minimum wage for tax and pension contribution purposes, when their actual earnings are higher.

  • Raising female participation in the labor market. At less than 30 percent, the female participation rate is very low by the standards of middle income countries. The ratio has been increasing in recent years however, and rapid gains over the last two decades in the educational attainment of women suggest this trend will continue.

C. Concluding Remarks

14. Raising national savings will require an ambitious, multi-pronged effort. Furthermore, there is no guarantee that these efforts will succeed: it could be that the reform of private pensions will increase this particular form of savings but only at the expense of other forms; it could be that raising public pension contribution rates will push more people into informality, negating the gains. The fact that the national saving rate has been relatively stable over the last ten years despite large underlying changes in public and private savings should sound a note of caution. Still, the stakes are too important not to try: Turkey is a country with large potential, one that will remain partially unfulfilled for as long as its saving rate remains low.


  • Başkaya, Y. S. and T. Hülagü, 2011, “Informal-Formal Worker Wage Gap in Turkey: Evidence From A Semi-Parametric Approach,” Central Bank of the Republic of Turkey Working Paper 11/15.

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  • Carroll, C. D. and D. N. Weil, 1994, “Saving and Growth: A Reinterpretation,” Carnegie-Rochester Conference Series on Public Policy 40, pp. 133192.

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  • IMF, 2007, “Safe to Save Less? Assessing the Recent Decline in Turkey’s Private Saving RateIMF Country Report No. 07/364 (Washington: International Monetary Fund).

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  • Matur, E. P., Sabuncu, A. and S. Bahçeci, 2012, “Determinants of Private Savings and Interaction Between Public and Private Savings in Turkey,” Topics in Middle Eastern and North African Economies 14, pp. 102125.

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  • Özel, Ö. and C. Yalçın, 2012, “Private Pension Plans and Domestic Savings with Special Emphasis on the Turkish Case,” Unpublished draft.

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  • Rodrik, D., 2012, “The Turkish Economy after the Global Financial Crisis,” Ekonomi-tek 1, pp. 4161.

  • Van Rijckeghem, C., 2010, “Determinants of Private Saving in Turkey: An Update,” Bogazici University Working Paper 2010/04.

  • World Bank, 2012, “Sustaining High Growth: The Role of Domestic Savings,” Turkey Country Economic Memorandum, Report #66301-TR (Washington: World Bank).

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Prepared by Jacques Miniane (EUR)


In other words, the decline in the standard definition of savings stemmed in part from rapid increases in durables consumption which outpaced overall consumption.


The exact quantitatite contribution of each factor to the decline in savings varies from study to study, because of differing sample periods, methods, etc.


The offset is not so clear-cut before 2003, but high inflation in the 1990s and early 2000’s complicates the proper disaggregation between public and private savings (as inflation is implicitly a tax on private savings that benefits the government). While measures of inflation-adjusted public/private savings exist, they are imperfect at best.


Post-2009, the global recovery and normalization of financial conditions are behind the recovery and resumption of credit in the Turkish economy, contributing to higher public savings and lower private savings.


Lack of full Ricardian equivalence makes sense in Turkey, given the large number of liquidity constrained households among other things.


Since 2005, credit as a share of GDP has increased by some 30 percentage points. Needless to say, this should not mean that more credit is always a good thing.


One should mention here important factors that boosted savings during this period. Chief among these was higher growth in income per capita, consistent with evidence from other regions (see Carroll and Weil, 1994) that, in growth accelerating episodes, higher growth precedes and statistically causes higher savings, and not the other way around. Also, note that Matur et al. (2012) included both the level of income and its growth and found a positive effect on savings from the former but a negative effect from the latter.


Strong consumption (including of durables) contributed to the large deterioration in private savings over the last three years, and in this sense it contributed to the widening of the current account deficit as much as investment did. However, higher public savings compensated for the decline in private savings over this period, so viewed from an S-I perspective the rise in investment fully explains the deterioration in the current account.


This is, again, the Carroll and Weil (1994) view of the world. Note that these authors rationalized the increase in savings during episodes of rapid income growth with the existence of habits in consumption.


Private pension accounts have not been very popular in Turkey.


Özel and Yalçın (2012) suggest that the reform might have only a modest impact, 1.5 percentage points of GDP at most.

Turkey: Selected Issues
Author: International Monetary Fund. European Dept.