The Executive Directors of the International Monetary Fund (IMF) welcomed the strong recovery of the Turkish economy during 2010, with output exceeding its pre-crisis level and unemployment moderating significantly. They noted, however, the sharply widening current account deficit, which is linked to weak competitiveness in the context of abundant low-cost external financing.
On February 11, 2011, the IMF Executive Board concluded the Second Post-Program Monitoring Discussions with Turkey. The relevant report of IMF was published on Wednesday.
"Turkey's main challenge is determining the right policy mix in the face of vulnerabilities arising from excessive domestic demand and volatile short-term capital flows", IMF report said.
Executive Directors of IMF recognized that Turkey's favorable near-term growth prospects and healthy balance sheets would likely continue to attract capital inflows, but also cautioned against the risk of a sudden capital flow reversal. They noted that these vulnerabilities could be effectively addressed through a combination of fiscal and macroprudential tightening, more restrictive liquidity conditions, and competitiveness-enhancing structural reforms.
Directors considered the authorities' planned fiscal policy in 2011. While some Directors viewed the policy stance as broadly appropriate, many called for fiscal tightening to restrain domestic demand and rein-in the current account deficit.
"Monetary policy should continue to focus on price stability, essential for durably strengthening competitiveness", IMF Executive Board said.
IMF encouraged the authorities to continue with direct measures to contain liquidity expansion, including limiting exchange rate interventions and increasing reserve requirements. Directors welcomed the early signs of success of the Central Bank's strategy to allow increased volatility of short-term market interest rates. They noted that recent decreases in policy rates entail some risks and urged the authorities to stand ready to raise the policy rate in the event current measures are insufficient to contain inflationary pressures.
Directors welcomed the authorities' increased focus on systemic financial-sector risk and a moderate tightening of macroprudential measures. A number of Directors, however, called for further actions in these areas. Directors also welcomed the upcoming Financial Sector Assessment Program update.
Directors encouraged progress on structural reforms to enhance competitiveness and resilience to capital inflows. They welcomed the improvement in accounting standards and strengthening of shareholder rights under the recently approved Commercial Code.
Directors welcomed the authorities' continued commitment to their Post-Program Monitoring with the Fund.
In IMF report, real GDP is forecast to expand by a robust 4.5 percent in 2011, nominal GDP growth rate - 11.2 percent, CPI inflation - 6.5 percent, PPI inflation - 6.7 percent, GDP deflator growth rate - 6.4.