Fragile economy needs reform: IMF to Turkey

Fragile economy needs reform: IMF to Turkey

Fragile economy needs reform: IMF to Turkey


The IMF issued a report Monday which featured concerns that were far in excess of those entertained by ministers like Ali Babacan, even though the minister – who is most trusted by financial markets – said Turkey was ready for the normalization of monetary policies in developed countries.

According to the IMF, with the changing world environment, global spillovers have entered a new phase. While advanced countries are recovering, a broad-based slowdown is seen in emerging markets. This calls for a need for stronger policy actions at national and global levels, the report said.

The “spillover” effect that the IMF has been focusing on for the past four years is the steps taken during and after the crisis and policy actions that have a positive effect on the source countries but a negative effect on those countries that have commercial and financial relations with these countries.

The IMF sees two main outcomes in economic trends: First, interest rates are expected to rise as recovery takes hold in some major advanced economies such as the United States and the United Kingdom. Yet, with recovery uneven across countries – faster in the U.S. and U.K. than in the Eurozone and Japan – normalization will proceed at different rates. This has possible spillover implications as well.

Second, emerging market economies are slowing in a synchronized and protracted manner, and average emerging market GDP growth is projected to decline from 7 percent during the pre-crisis period (2003-2008) to 5 percent over the next five years.

The IMF report said these two risks could intersect and interact with each other. Markets may reassess growth prospects in emerging markets if there are renewed bouts of financial turbulence as advanced economies normalize monetary policy.

If there is downsizing, Turkey is regarded as the country to suffer the heaviest fall in its economic growth (more than 3.75 percent in 2015).

The IMF has also used the term “neighborhood effect” for the first time. The report highlights local spillovers from emerging markets to other emerging and low-income countries, or the “neighborhood” effect. For example, a slowdown in China would impact emerging Asia countries; one in Brazil would impact South American countries.

The IMF is recommending better communication and cooperation to advanced countries. A smooth normalization of monetary policies can be achieved, but monetary shocks could have negative spillovers that could be amplified by miscommunication.

Emerging markets should implement structural reforms to boost productivity and medium-term growth, the report said.

Priorities that change from country to country are also highlighted. While infrastructure is the common denominator, electricity and transportation come forward in some countries, although in Turkey it is “improving education and addressing skill shortages.”

Vulnerable emerging markets according to the IMF are those countries that have high inflation rates as well as high current account deficits. Turkey is among the vulnerable emerging markets, according to the IMF. Strengthening policy frameworks and fundamentals is desirable from a domestic perspective and could mitigate adverse external spillovers, it said – but this should actually be read as “Make a new economic policy.”