TBY talks to Mark Lewis, Senior Resident Representative of the IMF in Turkey, on GDP growth, the current account deficit, and targets for 2023.
TBY The IMF has predicted that Turkey’s rate of growth will be 2.5% in 2012, contrary to competing forecasts. What would you say is behind the difference in projections?
MARK LEWIS We project 2.5% for 2012, which is close to the market consensus. The authorities in their recent Medium-term Program project 4%, so there has been some debate about whether we have a different view on Turkey’s economic prospects. To this I would say two things. One is that Turkey sees very large swings in GDP. In 2007, real GDP growth was about 5%, in 2008 it was 0.5%, and in 2009 it was -5%, while in 2010 it was over 9%, and we project close to 8% for 2011. With these types of swings, the difference between 2.5% and 4% is not very much. In other countries that have much more stable GDP growth, the difference between 2.5% and 4% is more dramatic, but in Turkey it is less so. The second point is that compared to observers with higher GDP estimates, our projections reflect important concerns about Europe and the external environment, as well as a need to see Turkey’s current account deficit decline, which we project to happen in 2012. It’s also worth saying that in terms of estimates for 2012, there are other estimates that project even slower growth than the IMF.
How would you assess government measures to address the current account deficit?
The current account deficit does need to come down and that’s in Turkey’s long-term interests because the higher the current account deficit, the more financing is needed, and more financing means more debt in the system. Eventually you don’t want the external debt, in this case of the private sector, to build up too rapidly or too high. Otherwise, it becomes a risk. In terms of the policies the authorities have implemented, there has been some success. More may be needed, and we hope it succeeds. Public finances here are strong, public debt is falling, and the government deficit is improving. From a macroeconomic perspective, public finances could probably do more to boost government savings, which would help to manage domestic demand and thus reduce the current account deficit. A second actor is the Banking Regulation and Supervision Agency (BRSA). It has taken some steps to control areas where credit increase and borrowing is increasing very rapidly, and those steps have been effective, but there may be additional things it could do. In terms of the Central Bank of the Republic of Turkey (CBRT), there may be steps it can take also. It has taken useful steps to tighten liquidity conditions recently and obviously policy will need to adjust based on how economic conditions evolve.
Do you support the CBRT’s unorthodox monetary policy?
Much of what it has done has been successful in containing the particular pressures that Turkey faces. The authorities’ approach has been going on for about a year and a half now and the challenges and the global environment has shifted. Earlier, there was a problem of how to manage large capital inflows, and then the current account deficit. Later, the authorities became concerned about growth, and now the issue is inflation and the exchange rate. The CBRT has adjusted its policies to address the challenges as they change, and I think that it has had some success with that in what is a very difficult environment. From our standpoint, we would just encourage it to remain vigilant, and as conditions change be ready to use all of its policy tools, which it hasn’t used yet. It hasn’t used the one-week repo rate, which is a key tool and one of its principal tools, and it has been reluctant to use it. In particular, we would see a return to the single policy rate in the near future as helpful for reducing uncertainty in the economy and boosting financial sector development. There are times when that has been difficult to do, but there have been times more recently when it might have helped.
Can Turkey become the world’s 10th biggest economy by 2023?
It is possible, but will require important increases in savings and investment and an acceleration of structural reforms to boost productivity in the economy. From the IMF’s 2011 Article IV Consultation, I would highlight that economic performance has been strong, and macroeconomic policies have generally been good. Turkey has demonstrated its ability to adjust to a difficult and changing external environment. Looking ahead from a macroeconomic perspective, it will be important to use fiscal policy as a demand management tool to manage domestic economic conditions. Continued vigilance on inflation will be important as will continued strong supervision of the financial sector. The financial sector is in good shape, but we want to make sure it remains that way. Finally, structural reforms to boost the competitiveness and productivity of the Turkish economy will be essential.
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