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Author:
International Monetary Fund. European Dept.
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Publication Date:
11 Oct 2024
eISBN:
9798400290848
Language:
English
Keywords:
policy stance; FX liquidity risk; IMF Policy recommendation; sequential inflation; decarbonization policy; Disinflation
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IMF Country Report No. 24/312

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IMF Country Report No. 24/312

REPUBLIC OF TÜRKİYE

2024 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF TÜRKİYE

October 2024

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2024 Article IV consultation with the Republic of Türkiye, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its September 27, 2024 consideration of the staff report that concluded the Article IV consultation with the Republic of Türkiye.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 27, 2024, following discussions that ended August 21, 2024, with the officials of the Republic of Türkiye on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 12, 2024.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Republic of Türkiye.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

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International Monetary Fund

Washington, D.C.

© 2024 International Monetary Fund

Press Release

PR24/369

IMF Executive Board Concludes 2024 Article IV Consultation with Türkiye

FOR IMMEDIATE RELEASE

Washington, DC – October 11, 2024: On September 27, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Türkiye.

A decisive shift in economic policies over the past year has tightened Türkiye’s overall policy stance. The Central Bank of the Republic of Türkiye (CBRT) has brought the ex ante real policy rate into positive territory while reducing regulatory complexity. Tax and expenditure measures underpin efforts to restore fiscal prudence and the commitment to stronger incomes policies has strengthened credibility.

The policy turnaround has reduced economic imbalances and revived confidence. Headline inflation has fallen as tighter financial conditions are weighing on domestic demand. Market sentiment has sharply improved, with domestic and foreign investors shifting into lira-denominated assets while lower commodity prices, buoyant exports, and reduced gold imports have strengthened the current account, supporting a large improvement in both the gross and net reserves position. The financial and corporate sectors appear to have weathered the policy tightening and financial liberalization so far. Credit default swaps (CDS) spreads are now at about half their mid-2023 levels.

Under the authorities’ gradual policy adjustment, inflation is expected to further decline. Contractionary ex ante real policy rates, moderating wage growth, and more contractionary fiscal policy in 2025 are expected to reduce inflation to 43 percent this year and 24 percent in end-2025. After a strong first quarter, growth has weakened and is expected to fall to 3 percent in 2024 and 2.7 percent in 2025, recovering toward 4 percent in the medium term. Disinflation and improved confidence will support a narrowing of the current account deficit to about 2 percent of GDP and reserves to around 100 percent of the IMF’s adequacy metric.

Risks around the baseline are significant and tilted to the downside. They include stronger-than-expected wage and price inertia, a reversal of capital flows, higher global energy prices, and escalating geopolitical tensions. Significant financial and external vulnerabilities remain. The authorities’ gradual approach to fighting inflation prolongs the period during which risks might occur.

Executive Board Assessment2

The Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the decisive policy tightening since mid-2023, which has helped to significantly reduce macroeconomic imbalances and risks. However, with inflationary pressures still high, and significant downside risks, they urged the authorities to press ahead with coordinated fiscal, monetary, and incomes policies to anchor inflationary expectations and entrench macroeconomic stability.

While noting sustainable public debt levels, Directors recommended a larger and more frontloaded fiscal consolidation to support disinflation efforts and further strengthen buffers. They supported strengthening tax administration, rationalizing tax expenditures, broadening the tax base, energy subsidy reform, limiting capital spending to essential projects, and enhancing risk monitoring while protecting earthquake related spending. Directors also urged further efforts to address fiscal risks arising from contingent liabilities in state owned enterprises, public private partnerships, and pension costs.

While noting the challenges, Directors considered that phasing out backward looking indexation and shifting toward setting wages in line with inflation expectations could significantly help reduce inflation.

Directors called for continued tight, data dependent monetary policy until inflation converges to target levels. They agreed that the central bank should stand ready to tighten further if needed to ensure that the path of disinflation stays on track. Directors highlighted that further strengthening the monetary transmission mechanism and central bank independence and communication would enhance policy credibility.

Directors encouraged foreign exchange intervention to focus on smoothing potentially destabilizing exchange rate movements that could dislodge inflation expectations, and to be scaled back as inflation recedes. They highlighted the need to effectively manage volatile capital flows and agreed that capital flow measures should be discontinued gradually as FX liquidity risk and inflation recede.

Directors underscored the importance of ongoing vigilance and further reforms to maintain financial stability. They supported continued implementation of the 2023 FSAP recommendations and efforts to align the supervisory and regulatory framework with Basel III standards. Directors commended the authorities for recent improvements to the AML/CFT framework and exit from the FATF grey list, while noting that further progress was needed, including to mitigate virtual assets risks.

Directors called for advancing structural reforms to achieve more inclusive, greener, and higher medium-term growth. Further energy and labor market reforms, including to boost female participation, remain important priorities.

Türkiye: Selected Economic Indicators, 2019-29

article image
Sources: Turkish authorities; and IMF staff estimates and projections. 1/ Headline (or authorities' definition), which includes items excluded from the IMF 'program' definition.

Title page

REPUBLIC OF TÜRKİYE

STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION

September 12, 2024

KEY ISSUES

Context. A significant tightening of macroeconomic policy since mid-2023 has substantially reduced crisis risks. Tighter financial conditions are weighing on domestic demand and inflation has fallen. Tax and expenditure measures partly dampened an expansionary fiscal impulse and the commitment to stronger incomes policies has strengthened credibility. Market sentiment has improved, with investors shifting into lira while lower commodity prices, buoyant exports, and reduced gold imports have strengthened the current account and boosted international reserves. Türkiye’s sovereign ratings have been upgraded and country risk premia have halved. While now subsiding, still-high inflation expectations and sequential inflation suggest an insufficiently tight policy stance to reach the midpoint of the authorities’ inflation forecast range.

Outlook and Risks. Under the authorities’ gradual adjustment, staff expects inflation to fall to 43 percent at the end of this year, just above the Central Bank of the Republic of Türkiye’s forecast range. Growth is slowing after a strong first quarter, and is expected to fall to 3.0 percent in 2024. A recovery should start in early 2025, but growth would remain below trend at 2.7 percent, as inflation falls to 24 percent and the policy stance neutralizes. Growth should recover toward 4 percent in the medium term. Disinflation and improved confidence will support a narrow current account deficit and sustain the reserves position. Risks around the baseline remain significant and tilted to the downside. Strong price inertia or external shocks could derail disinflation, and significant financial and external vulnerabilities remain.

Policies. A tighter policy stance would more swiftly and sustainably reduce inflation and reduce risks. More decisively contractionary fiscal policy would weigh on aggregate demand while forward-looking incomes policies would contribute to re-anchor expectations. Tight monetary policy will be needed until sequential inflation is on a sustainable downward path, supported by prudent exchange rate policy. Following up on the 2023 FSAP recommendations would support financial stability and help manage capital flow volatility. A rapid disinflation would, on balance, likely involve lower risks than a more gradual adjustment and strengthen long-term growth and financial stability, albeit potentially at greater short-term cost to output. Throughout disinflation, it will be necessary to modernize fiscal policy and reduce fiscal risks. Other structural reforms encompass decarbonization policies, reducing informality and improving the functioning of the labor market, and increasing female labor force participation.

Approved By

Kristina Kostial (EUR) and Rishi Goyal (SPR)

Discussions took place in Istanbul and Ankara during May 29–June 11, 2024 with follow-up discussions August 20–21. The team consisted of J.P. Walsh (Head), F. Boumediene, S. Domit, A. Roitman, and J. Yao (all EUR), A. Ceber (FAD), B. Versailles (SPR), and M. Leika (MCM), and G. Di Bella, R. Çeçen and D. Kesimal (Senior Res. Rep. office). M. Mert and Y. Akben (OED) also participated in the mission, and K. Kostial (EUR) joined several meetings. The mission met with Minister of Treasury and Finance Şimşek, Central Bank Governor Karahan, other senior officials, and private sector representatives. J. Lee, M. Murillo, and S. Mengüç assisted with the mission and with the preparation of the staff report.

Contents

  • CONTEXT

  • THE SETTING

  • OUTLOOK AND RISKS

  • A. Slow Disinflation and a Subdued Medium-Term Outlook

  • B. Lower Risks but Tilted to the Downside

  • POLICY DISCUSSIONS

  • A. Bringing Inflation Down

  • B. Safeguarding Stability and Boosting Medium-Term Growth

  • STAFF APPRAISAL

  • BOXES

  • 1. Earthquake Spending and the Fiscal Stance

  • 2. Fiscal Risks

  • 3. Minimum Wage and Inflation

  • 4. Staff Scenario—A More Secure Disinflation

  • 5. Tightening Monetary Policy

  • FIGURES

  • 1. Real Sector Developments

  • 2. Inflation Developments

  • 3. Financial Markets

  • 4. Financial Sector

  • 5. Credit Growth Developments

  • 6. Fiscal Stance

  • 7. External Sector

  • 8. Climate Change

  • TABLES

  • 1. Selected Economic Indicators, 2019–29

  • 2a. Summary of Balance of Payments (Billions USD), 2019–29

  • 2b. Summary of Balance of Payments (Percent of GDP), 2019–29

  • 3. External Financing Requirements and Sources, 2019–29

  • 4. Public Sector Finances, 2019–29

  • 5. Monetary Survey, 2019–29

  • 6. Financial Soundness Indicators, 2013–24

  • ANNEXES

  • I. Authorities’ Response to Past IMF Policy Recommendations

  • II. 2023 Key FSAP Recommendations—Implementation Status

  • III. Financial Liberalization Measures Since July 2023

  • IV. Public Debt Sustainability

  • V. External Sector Assessment

  • VI. Risk Assessment Matrix

  • VII. Data Issues

  • VIII. How Should Türkiye Respond to an Acceleration in Capital Inflows?

  • IX. Greening the Corporate Sector

  • X. Reducing Gender Gaps with Taxation—Lessons from Recent Reforms

1

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Republic of Türkiye: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Türkiye
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2024: Issue 312
Publisher:
International Monetary Fund
ISBN:
9798400290848
ISSN:
1934-7685
Pages:
99
DOI:
https://doi.org/10.5089/9798400290848.002