IMF: Rapid Growth Yields Large External Deficit In Turkey

The International Monetary Fund (IMF) has warned that Turkey's economy was in a vulnerable position after high growth rates in recent years caused the trade deficit to widen and encouraged the country's economy management to follow an ambitious reform agenda, which was announced with the government's 10th development plan early in November.

According to the concluding statement of the IMF's executive board on Nov. 21 regarding the Article IV Consultation, Turkey's economy has had an average growth rate of 6 percent since 2010. This created a large external deficit, which increased the country's vulnerability to changes in external financial conditions. The statement noted that considerable growth rates in the last four years are welcomed by the organization; however, the growing economy also caused inflation to rise, surpassing expectations along with the growing external deficit.

The report states that the IMF directors welcomed measures taken by the Turkish authorities in early 2014 to strengthen the economy by reducing the financial markets' vulnerability

The IMF highlighted that the main risk for the Turkish economy is the possibility of a sudden reversal in capital flows into the country amid monetary policy normalization in advanced economies or changes in the country risk premium. The statement also listed slower European growth, geopolitical conflicts surrounding Turkey and the strength of the policy framework of Turkey's central bank.

Appreciating the strong capital position of the Turkish financial system, the IMF warned Turkish banks against indirect foreign exchange risk since lenders are highly reliant on external funding in foreign exchange. The report also underlined the importance of increasing national savings -- especially private savings -- and reducing reliance on external financing.

The statement also welcomed monetary and fiscal tightening in the country's projections in the 2015 budget and called for a renewed focus on reducing inflation via a real policy rate.

Nonetheless, Turkey should accelerate implementing the reforms envisioned in the government's 10th development plan for the economy in order to reduce reliance on external financing and increase national savings, the IMF recommended.

Economist Süleyman Yaşar wrote in his column on Monday for the Taraf daily that the IMF's recommendation for Turkey to increase interest rates would not yield the desired result. Yaşar opined that the government took certain financial measures in early 2014 in order to reduce inflation rates based on the IMF's previous recommendations; however, inflation rates increased from around 7 percent to 9 percent. Likewise, unemployment rates rose from 9 percent to 10 percent.

(Cihan/Today's Zaman)