Turkey needs a credible macroeconomic framework: OECD
The report penned by Rauf Gönenç, a senior economist at the Turkey desk, underlined that the Medium-Term Economic Program provides prudent fiscal framework, and recent monetary tightening should be backed with stronger institutional credibility of monetary policy.
OECD analyst Rauf Gönenç went on to say the uncertainties surrounding the early elections in June, as well as persisting regional geopolitical tensions, create risks. According to the analyst, the exchange rate remains highly volatile, with the Turkish Lira depreciating substantially recently despite a significant increase in the policy interest rate, and consumer price inflation is far above target. Disinflation is projected to be slow, he went on further.
The report, which analyzed the reasons behind the strong economic growth recorded in 2017 and 2018, noted that “strong growth has amplified Turkey’s longstanding imbalances, which arise from excessive reliance on domestic demand.” The report listed the required moves under the title “Increased imbalances and uncertainties call for a credible macroeconomic framework.”
It estimated that the current account deficit will surpass 6 percent of the GDP in 2018 and “foreign financing needs are projected to reach 25 percent of the GDP in 2018.” According to the report, oil price increases have put additional pressure on the current account and external funding will become less abundant and more costly as advanced OECD economies normalize monetary policy.
The report, which argued that fiscal policy has added to the imbalances and spending pressures increased strongly in spring 2018, owing to new business incentives and further social transfers, also said “early elections in June 2018 create room for post-electoral consolidation in line with the government’s Medium-Term Economic Program. The fiscal position should be reported fully and transparently, with timely quarterly general government accounts according to international standards.”
Growth target within reach, but…
The report underlined that the commitment of the Central Bank to the official 5 percent inflation target is in question after several years of overshooting and five consecutive quarters of double-digit inflation. This exacerbated exchange-rate depreciation and volatility, considerably increased the country’s risk premia, and heightened risks associated with external debt, the report added.
According to the report, on the back of strong positive carry-over from late 2017 and early 2018, minus any further severe tensions on exchange rates and risk premia, GDP growth is projected to stay around 5 percent in 2018 and 2019.
“If the electoral process concludes without major tensions, fiscal and monetary policies do not remain pro-cyclical, and ambitious but delayed structural reforms are phased in after the elections, consumer and investor sentiment may improve and growth may be stronger,” it said.
The report stressed that if confidence weakens following additional uncertainties regarding the macroeconomic policy stance or the outlook for structural reform after the elections, or as a result of further tensions in financial markets and exchange rates, capital movements and domestic sentiment may weaken investment, consumption and growth.