Growth remains buoyant in Turkey but fundamentals need to be strengthened
Despite numerous headwinds and adverse shocks, Turkey’s real GDP has grown by more than 34% over the past 5 years, faster than any other OECD country except for Ireland and only slightly less than China and India. The revision of national accounts in early 2017 not only pointed at higher than previously accounted growth since the global financial crisis, but also exhibited much higher shares for private consumption and investment, notably construction, in overall output underscoring long-lasting imbalances (e.g. OECD, 2016). Indeed, despite a significant rebound of exports in late 2017 and early 2018, growth still excessively relies on domestic demand amplifying the Turkish economy’s dependence on capital inflows (Panel A). Expansionary fiscal policy ahead of the June 2018 elections had further amplified these imbalances. The clear outcome of the polls should allow the government to implement fiscal restraint and realign its policies with the government’s Medium-Term Programme. It is essential to make progress with the transparency of general government accounts according to national accounting standards to preserve the hard-won credibility of public finances.
Inflation has been on the rise and remained in double-digit territory since early 2017 undermining confidence, international competitiveness and households’ purchasing power. Inflation expectations have continued to drift away from the 5% target (Panel B). Market participants increasingly questioned the central bank’s capacity to conduct a credible and forward-looking policy of inflation targeting amid doubts about its independence. Despite substantial increases in the central bank’s average funding rate, the mere fact of using the unorthodox late night liquidity window as a main funding tool spurred doubts about the commitment to maintain a tight stance over an extended period to re-anchor expectations and bring about disinflation. Against this backdrop, the simplification of monetary policy around a single standard interest rate in June 2018 is a welcome step towards re-establishing credibility. Going forward, a firm commitment from all stakeholders to the central bank’s independence would be supportive and help the bank to fulfil its mandate.
Alongside sound fiscal and monetary policy, the improvement of governance institutions and the reform of the banking sector were the main pillars of Turkey’s economic success over the past 15 years. While the banking sector still looks solid, a recent deterioration in the perceived quality of public governance and the stalling EU Accession process weigh on the business environment in general and the economy’s capacity to attract foreign direct investment in particular. The government’s goal to improve Turkey’s position in the Doing Business indicator is promising and should be used as an anchor to resume progress with respect to the rule of law, judiciary independence and the fight against corruption.
Source: OECD
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