On May 18, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Turkey. Here is a quote from the final document of the consultation:

"Turkey has experienced an impressive economic revival in recent years. Sound economic policies anchored to Fund arrangements, as well as political stability and favorable external conditions, have resulted in average annual growth of 7½ percent since 2002. Private consumption and investment have been the main drivers, fueled by declining real interest rates, surging capital inflows, rapid credit expansion, and rising productivity. Meanwhile, inflation has dropped dramatically over the past five years.

The real economy has undergone significant modernization, becoming less reliant on traditional sectors and more open to trade and foreign investment. Exports have continued to gain market shares, as the effects of an appreciating currency have been largely offset by productivity gains. Slack in the labor market has kept labor costs in check.

Balance sheets have also strengthened. Public debt ratios have come down considerably, and the composition of debt has improved. Bank balance sheets have also become more robust.

These positive outcomes have been driven, in large part, by disciplined policies and advances in structural reforms. On the macroeconomic side, adherence to the 6.5 percent of GNP primary surplus target combined with monetary policy restraint by an independent central bank have helped bring down inflation, strengthen confidence, and ease real interest rates. The floating exchange rate has been an effective shock absorber and has provided good incentives for managing currency risks. On the structural side, bank recapitalization and enhanced supervision, tax reforms, and privatization have restarted private credit growth, promoted foreign direct investment, and spurred competitiveness.

Still, the Turkish economy faces a number of macroeconomic challenges. In particular, the economy's dependence on large capital inflows exposes Turkey to swings in investor sentiment (as witnessed during recent periods of market turbulence). Also, inflation well above target (due to a series of supply shocks, currency depreciation, and inertia in expectations) continues to require tight monetary policy. And, in order to sustain and build on recent improvements in growth, a number of structural challenges need to be tackled. These include a low employment rate, still limited financial intermediation, a large informal sector, and potential bottlenecks in electricity supply."

Labels: economy, imf