The International Monetary Fund has projected that Turkey’s economic growth will remain below its potential in 2016 and 2017, citing a number of significant political and economic risks.
"After robust growth through the first quarter of 2016, the expansion has slowed. Growth is projected at 2.7 percent in 2016 and 2.9 percent in 2017 with considerable downward risks. Domestic consumption is the main growth driver, supported by a large increase in public expenditure and a hike in the minimum wage. However, political uncertainty, weakened corporate profitability, anemic credit growth, and a sharp fall in tourism have taken a toll on investment and net exports,” stated the IMF in a press release on Feb. 3 regarding its 2017 Article IV Consultation.
The political focus on transitioning to a presidential system, renewed questions on the future of EU-Turkey relations, the tense security situation in southeast Turkey, and conflicts in neighboring countries are all expected to prolong the uncertainty, keeping domestic demand subdued, according to the IMF.
"Fiscal stimulus and the expected completion of the gradual lifting of Russian sanctions are expected to support growth. Over the medium-term, growth is projected to firm around 3.5 percent. Inflation is expected to stay above target and the current account deficit to remain sizeable,” it added.
"The monetary stance and macro prudential measures were loosened, but credit growth continues to slow. A negative output gap is opening, but sticky expectations are keeping inflation above target,” the IMF also warned.
External financing conditions were favorable in the first semester, helping the rollover of large financing needs and supporting the Turkish Lira, noted the IMF.
"However, political uncertainty after the failed coup attempt and a less favorable external environment are weakening the lira and increasing the cost of external financing,” it added.
In 2017, some discretionary fiscal measures should be used and the authorities should continue simplifying the monetary framework, keeping a broadly neutral monetary policy stance, according to the IMF report.
"Monetary tightening could be required to limit excessive lira volatility and its spillovers to inflation. The Central Bank should continue to accumulate foreign reserves to build buffers, against the backdrop of a choppier external environment. Macro-prudential policies should focus squarely on ensuring the soundness of the financial system. Structural reforms should focus on increasing private domestic savings, improving the business climate and reducing informality,” it added.