On December 9, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
In the wake of the global financial crisis, growth in Turkey became
increasingly dependent on externally-funded credit and demand stimulus,
and, as a result, Turkey’s economy began running above potential with a
large current account deficit and high inflation. These imbalances left
the economy susceptible to a change in market sentiment that ultimately
triggered sizeable lira depreciation and was accompanied by a recession
in late 2018.
Economic growth has since resumed, buoyed by expansionary fiscal
policy, rapid credit provision by state-owned banks, and more favorable
external financing conditions. The lira also recovered as market
pressures abated. Import compression and a strong tourism season have
contributed to a remarkable current account adjustment.
Inflation has fallen sharply, and the central bank cut policy rates by
1,000 basis points since July 2019. Inflation peaked at around 25
percent—five times the target—in October 2018 due, in large part, to
high exchange rate passthrough and rising inflation expectations. But
strong base effects, relative lira stability, and a negative output gap
have since contributed to a steep inflation decline, although inflation
expectations remain well above target.
Fiscal discipline, a longstanding policy anchor, has been gradually
weakening. After declining for several years, the central government
primary balance recorded a deficit in 2018, for the first time in
almost a decade. Fiscal stimulus continued in the first half of 2019,
in contrast to the consolidation planned in the late-2018 New Economy
State-owned banks are supporting rapid credit growth. While private
banks have cut back on their lending, state-owned banks have engaged in
a major credit expansion which picked up pace in early-2019.
Reserves are low and external financing needs high. Non-financial
corporate and bank balance sheets have been stressed by lira
depreciation, higher interest rates, and lower growth. While public
debt is low, the fiscal deficit has increased and uncertainty over the
possible scale of contingent liabilities and potential debt rollover
pressures limit available fiscal space.
Executive Board Assessment 
Executive Directors noted that stimulus-driven growth in previous
years had contributed to large economic imbalances in the Turkish
Following the recession in 2018, expansionary fiscal policy, rapid
credit provision by state-owned banks, and more favorable external
financing conditions led to a resumption of economic growth. Directors
emphasized that the current calm remains fragile and that
vulnerabilities persist. These include low reserve buffers, large
external financing needs, and stressed bank and corporate balance
sheets. Against this background, Directors underscored the importance
of prudent policies to address weaknesses and highlighted the need for
a comprehensive package of reforms to secure stronger and more
resilient growth over the medium term.
Directors emphasized that fiscal policy should remain a key policy
anchor. While the recent fiscal stimulus has helped the economy
recover, the underlying deficit has increased significantly. Directors
recommended a broadly neutral fiscal stance in 2020, combined with
tight monetary and quasi‑fiscal policies, to strike a balance between
supporting the nascent recovery while also containing financing needs
and enhancing fiscal space. They noted that a modest consolidation is
needed over the medium term to ensure that public debt remains low and
stable. Directors welcomed the authorities’ efforts to strengthen
oversight and management of public-private partnerships.
Given still-high inflation expectations, Directors stressed that
monetary policy should focus on durably lowering inflation, which would
help permanently lower interest rates. In this context, they noted that
recent monetary policy easing has gone too far. Directors also called
for clearer monetary and intervention policy to bolster transparency
and central bank credibility. They recommended rebuilding international
reserves as conditions allow.
Directors emphasized that vigilance is needed in view of the rapid
credit growth of state-owned banks. They encouraged taking steps to
rein in credit growth and clean up bank and corporate balance sheets to
support financial stability and stronger, more resilient growth.
Directors generally agreed that a third‑party asset quality review and
new stress tests are needed to better understand underlying bank
health. Additional reforms to improve the insolvency regime and
out‑of‑court restructuring would also help release resources and
restart productive lending.
Directors called for focused and carefully sequenced structural reforms
to enhance medium‑term growth and increase resilience to shocks. In
particular, steps to improve product market efficiency, labor market
flexibility, the quality of human capital, and female labor force
participation would facilitate a reallocation of resources to
productive sectors. Governance reforms would also help improve the
investment climate and economic efficiency. Directors commended Turkey
for hosting a large number of refugees.