IMF praises Turkey’s economy growth, warns of ‘overheating’ risks

IMF praises Turkey’s economy growth, warns of ‘overheating’ risks

WASHINGTON - Anadolu Agency
IMF praises Turkey’s economy growth, warns of ‘overheating’ risks

The International Monetary Fund has praised Turkey’s economic growth performance, while also warning of “signs of overheating,” and welcoming a recent interest rate increase in a bid to curb rising inflation.

“Turkey’s growth performance last year was very impressive. It was the fastest growing economy among G-20 countries,” state-run Anadolu Agency quoted International Monetary Fund’s (IMF) Mission Chief to Turkey Donal McGettigan as saying in an interview.

“Not only did real gross domestic product growth reach almost 7.5 percent last year, the economy created 1 million jobs, which is truly impressive,” he said.

According to official data, Turkey’s economy grew 7.4 percent last year—the fastest expansion in four years—following 3.2 percent growth in 2016.

However, the growth performance of last year did not come without a cost, according to McGettigan.

“The growth was so strong that there are clear signs of overheating, in our view,” he warned.

“The clearest signs are inflation, which is well above the target, and the current account deficit, which grew wider,” said the IMF chief.

According to the most recent official data, annual inflation in the country was 10.23 percent in March, more than double the central bank’s 5 percent target.

In a bid to contain inflation, Turkey’s Central Bank raised one of its main rates, the late-liquidity lending rate, from 12.75 percent to 13.50 percent on April 25.

This step was in line with the recommendations of the IMF, which advocates further tightening to contain realized inflation as well as to anchor inflation expectations.

“In that sense, the recent Central Bank decision to raise its effective rate by 75 basis points is certainly a step in the right direction,” McGettigan said.

In addition to inflation, potential growth was a key focus during the “Article 4” discussions between the Turkish government and IMF staff.

The government is forecasting an annual economic growth of 5.5 percent during 2018-2020 as part of its medium-term economic program.

McGettigan said the 5.5 percent growth would add to the overheating, while Turkey grew an average of 5.8 percent in the last 15 years, according to official data.

“Clearly, there are grounds for differences between both sides on what potential growth is, but our sense is that potential growth is lower than 5.5 percent. This was one of the key discussions during the mission, and we will continue those discussions” he said.

Another area where Turkey got a decent grade from the IMF chief was structural reforms.

“I’d like to say that the reforms put in place from the early 2000s are deeply impressive. They left Turkey in a very good position to handle the global financial crisis,” McGettigan said.

While welcoming the more recent reforms to increase female labor force participation and flexibility in the job market, he also emphasized the importance of taking advantage of the current strong cyclical growth conditions to put in place further well-targeted reforms.

“A lot of reforms have been done, but our sense is further reforms are needed,” he said.

Severance pay, backwards looking wage indexation, pensions and improving quality of education were among other areas where further reforms are needed, the IMF chief suggested to Turkey.

“Addressing these would also help support sustainable growth and lower the cost of disinflation” he added.

McGettigan pointed to a strong policy stimulus, including temporary tax breaks, employment incentive schemes and the credit guarantee fund, as the main driver of last year’s robust growth.

“Reflecting stimulus, the growth was mainly driven by domestic demand. Even though exports were strong, imports were also strong, so net exports did not add a lot to growth,” he said.