The current positive market sentiment provides a good opportunity for Turkey to enact a set of reforms that would address vulnerabilities, strengthen policy credibility and set the economy on a higher and more sustainable growth path.
Thursday 26, September 2019 BY KUDAKWASHE MUZORIWA
The International Monetary Fund (IMF) reversed its prediction for an economic contraction in Turkey this year but called into question the country’s efforts to stimulate growth instead of taking advantage of a market lull to embark on long-overdue reforms.
The Washington based fund stated that buoyed by expansionary fiscal policy, rapid state bank credit provision as well as a strong contribution of net exports and more favourable market sentiment, the economy registered positive growth in the first half of 2019.
The fund expects a 0.25 per cent growth this year despite the large negative carryover effects from last year’s recession.
Additionally, Turkey’s import compression and a strong tourism season have led to a remarkable current account adjustment and only a small deficit is expected this year. Together with improved market sentiment and geopolitical developments, this taken pressure off the lira.
The favourable economic conditions set the stage for a steep decline in inflation. According to the IMF, high real policy rates, lira stability as well as favourable base effects and resulting lower inflation have allowed the central bank to cut policy rates.
Turkey posted a budget surplus for a second month after running a deficit for most of this year, as the Treasury received a part of the central bank’s reserve funds in July and August 2019.
However, the fund said that Turkey remains susceptible to external and domestic risks and prospects for strong, sustainable as well as medium-term growth look challenging without further reforms.
The IMF said that the fiscal deficit has increased and uncertainty over the possible scale of contingent liabilities and potential debt rollover pressures limit available fiscal space, describing Turkiye Cumhuriyet Merkez Bankasi’s easing cycle as too aggressive.
Despite the recent turnaround, the IMF said that without consistent implementation of a comprehensive package of reforms, medium-term growth is likely to remain subdued given balance sheet strains.
Turkey remains exposed to a deterioration in sentiment towards emerging markets, possible policy implementation risks and adverse domestic or geopolitical developments.