Policy shift improved credibility, led fall in risk premium to gradually reduce inflation, says IMF mission chief to Turkey
Welcoming Turkey’s recent economic policy shift, International Monetary Fund (IMF) officials said continued and consistent implementation of the new program would be vital in achieving its goals.
IMF Turkey Mission Chief Donal McGettigan and IMF Senior Resident Representative in Turkey Ben Kelmanson responded to questions of Anadolu Agency on pioneering findings of meetings with officials as part of Article-4 consultations on Turkey’s economy.
McGettigan pointed that Turkey, like other countries around the world, is dealing with a human and health tragedy in addition to a deep economic shock.
With the pandemic extending into its second year, McGettigan said while the Turkish economy is flexible, entrepreneurial, and resilient at its core, efforts are needed to be maintained in two broad areas.
“First to rebuild buffers to guard against shocks in an uncertain world, and second, to further strengthen Turkey’s underlying economic potential so that it can achieve strong and sustainable growth and employment in the years to come,” he argued.
Saying that the recent economic policy shift is both welcome and timely, McGettigan highlighted that firm and sustained monetary policy implementation is vital to delivering price stability and improving confidence both in Turkey itself and with overseas investors.
Fiscal policy should aim to complement this, providing targeted and temporary support in response to the pandemic, together with appropriate consolidation after the pandemic has abated to strengthen Turkey’s historically strong fiscal anchor, he stated.
The IMF official underlined the importance of focusing on mitigating the risk of the pandemic’s long-term adverse effects, including targeted measures to support the most vulnerable, encouraging focused reforms in the financial and non-financial corporate sectors and on labor market reforms.
Here is the interview
AA :What do you think about the global economic outlook amid the COVID-19 pandemic? What are the opportunities and risks for Turkey within the global context?
Donal McGettigan: The IMF’s recent update of its World Economic Outlook projects a global growth rebound from last year. Against an exceptionally uncertain outlook – with increased vaccinations weighed against concerns over new infection waves – the global economy is projected to grow by 5.5% in 2021, with emerging markets growing at a slightly higher rate.
As in other countries, Turkey is working to roll out vaccinations to dampen the spread of the virus. The success of this effort will be a critical driver of economic developments over the course of this year. Adhering to the recent welcome economic policy shift – including monetary policy tightening and simplification, the unwinding of ad hoc regulatory measures, the slowdown in state-owned bank lending, and commitment to preserving Turkey’s fiscal anchor – will also be important.
AA: Coronavirus has led to an economic downturn across the world. Turkey’s response to the pandemic has been relatively rapid and targeted. What is your assessment of Turkey’s policy reaction against COVID-19 and its economic effects?
McGettigan: As elsewhere, the pandemic has inflicted a heavy human and economic toll. The initial policy response to the pandemic which relied on similar tools used elsewhere: monetary easing, liquidity provision, and fiscal support – led to a very sharp rebound in GDP in the third and fourth quarters. Indeed, Turkey is among the few countries estimated to have posted positive overall growth in 2020.
But while the response used the same tools, it relied much more on rapid money and credit growth and less on direct fiscal support and as a result, the response exacerbated pre-existing vulnerabilities. Inflation remains well above target; and increased dollarization, relatively high imports, and financial outflows triggered large-scale foreign exchange intervention in an attempt to stem lira depreciation.
The recent economic policy shift, to tighten and simplify monetary policy, rein in credit growth, unwind administrative controls, along with complementary fiscal policy is welcome. This shift, which led to a recovery in the lira, improved credibility, and a fall in the risk premium, is also expected to gradually reduce inflation. But low foreign exchange reserves, coupled with high external financing needs and high domestic foreign exchange deposits, mean the economy is still vulnerable to shocks and changes in sentiment, both at home and overseas. Vulnerabilities will, accordingly, remain elevated until buffers are rebuilt. Continued and consistent implementation of the economic policy shift will be key to achieving this goal.
AA: In the latest staff concluding statement, the IMF raised its growth estimate to 6% in 2021 for the Turkish economy. What are the main motivations behind this upward revision?
Ben Kelmanson: Growth projections for 2021 have been revised upward from 5% to around 6%. Much of this year’s growth number is explained by the strong rebound in activity in the second half of last year, some of which is “carried over” to 2021 by raising the level of GDP at the start of this year. In addition, the vaccine rollout and the expected recovery in global growth should also support activity in Turkey this year. From 2022 onwards growth is projected to settle back to trend about 3.5%.
AA: The latest staff concluding statement shows that Turkey’s initial policy response led to a sharp rebound in GDP. What should be done to maintain the recovery?
Kelmanson: As noted previously, while Turkey’s initial policy response led to a sharp rebound in GDP, it also exacerbated pre-existing vulnerabilities, which led in turn to a necessary and welcome economic policy shift. This shift should be maintained as long as necessary. In particular, it will be important to maintain a firm monetary stance, accompanied by additional pandemic-focused fiscal support that is temporary and targeted. This should be accompanied by a medium-term fiscal consolidation plan, which could be legislated now, and enacted from 2022 onwards. Such policies would help rebuild credibility and buffers, while also responding to the human and economic needs arising from the pandemic. We also outlined targeted structural reforms in the fiscal, financial, and labor market and corporate sectors that would help mitigate any long-term impacts of the pandemic.
AA: In late 2020, Turkey’s economic administration has changed, and the new administration began to follow a tightening monetary policy. What do you think about the new economy administration’s policy approach?
Kelmanson: We welcome the recent economic policy shift to tighten monetary policy and address credit growth. We also applaud the simplification of monetary policy operations, including moving to a single policy rate. These moves have helped rebuild credibility, reduce risk premia, contain pressure on the lira, and stabilize reserves. A firm monetary stance should be maintained, with further measured tightening recommended if inflation expectations fail to stabilize. Policies should also be pursued that allow credit allocation to be more market-determined. In addition, complementary fiscal policy, to underpin Turkey’s historically strong fiscal anchor, should be pursued, combining targeted and temporary pandemic-related support this year with a medium-term fiscal consolidation plan to be enacted from next year.
AA: What is your expectation about the Turkish economy’s future in the short and long term?
McGettigan: The Turkish economy is flexible, entrepreneurial, and resilient. Turkey has a relatively young population. And Turkey is located at a crossroads for global trade. Against this backdrop, Turkey is well placed to thrive as the global economy begins to recover from, and reshape following, the COVID-19 pandemic. To make the best use of this opportunity, however, Turkey will need to address both short and longer-term challenges: first, to continue with the recent economic policy shift in order to rebuild buffers to guard against shocks in an uncertain world; second, targeted reforms first to minimize any lasting negative effects of the pandemic, and more broadly, to further strengthen Turkey’s underlying economic potential so that it can achieve strong and sustainable growth and employment in the years to come.