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Turkey—2010 Article IV Consultation and Post-Program Monitoring: Preliminary Conclusions-May 26, 2010

Turkey—2010 Article IV Consultation and Post-Program Monitoring: Preliminary Conclusions-May 26, 2010

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Published by EurasianObserver
Turkey—2010 Article IV Consultation and Post-Program Monitoring: Preliminary Conclusions1
May 26, 2010
A. Background and Overview
1. The Turkish economy entered the global financial and economic crisis following a six-year growth surge that was fuelled by far-reaching policy reforms and greater political stability. The reforms of the past decade, particularly fiscal discipline, introduction of inflation targeting, and overhaul of financial sector oversight, together with political stability and opening of EU accession negotiations, significantly improved confidence in the management of the economy. These factors contributed to a high fiscal primary surplus, rapidly falling public debt, and moderate inflation.
2. The aforementioned policy reforms kept pre-crisis vulnerabilities more contained than elsewhere in the region, enabling Turkey to better weather the ensuing international economic and financial disruption. Good policies in the context of surplus global liquidity attracted strong capital inflows that relaxed the financing constraint and enabled a domestic-demand led expansion. The resulting boom in private investment and fall in private savings led to a widening of the current account deficit in a strong currency environment. Nonetheless, Turkey’s domestic and external imbalances remained more contained than in the rest of Emerging Europe, reflecting a smaller foreign-financed credit boom, macro policies that were better focused on resisting the cyclical upswing, and more restrictive prudential regulations.
3. Growth has resumed, but risks being overly reliant on consumption, which would feed external vulnerabilities—especially in the current global environment. Vigilance and timely policy responses are required to avoid rising inflation and an unsustainable widening of the current account deficit in a strong capital–inflows environment, particularly if these flows are mostly short term.
B. Recent Developments and Outlook
4. The Turkish economy recovered quickly from the precipitous drop in output triggered by the global crisis. Globally-synchronized capital outflows and a sharp decline in confidence led GDP to fall by a seasonally adjusted 12 percent during Q4 2008-Q1 2009. Inflation and the current account deficit declined markedly on falling commodity prices and a widening output gap. Temporary tax cuts, an unprecedented reduction in policy interest rates, and deep price discounts fuelled a rapid recovery of demand from the second quarter, which contained the annual decline in GDP to 4¾ percent. Recently, increased indirect taxes and other price shocks and the rebound in demand and
Turkey—2010 Article IV Consultation and Post-Program Monitoring: Preliminary Conclusions1
May 26, 2010
A. Background and Overview
1. The Turkish economy entered the global financial and economic crisis following a six-year growth surge that was fuelled by far-reaching policy reforms and greater political stability. The reforms of the past decade, particularly fiscal discipline, introduction of inflation targeting, and overhaul of financial sector oversight, together with political stability and opening of EU accession negotiations, significantly improved confidence in the management of the economy. These factors contributed to a high fiscal primary surplus, rapidly falling public debt, and moderate inflation.
2. The aforementioned policy reforms kept pre-crisis vulnerabilities more contained than elsewhere in the region, enabling Turkey to better weather the ensuing international economic and financial disruption. Good policies in the context of surplus global liquidity attracted strong capital inflows that relaxed the financing constraint and enabled a domestic-demand led expansion. The resulting boom in private investment and fall in private savings led to a widening of the current account deficit in a strong currency environment. Nonetheless, Turkey’s domestic and external imbalances remained more contained than in the rest of Emerging Europe, reflecting a smaller foreign-financed credit boom, macro policies that were better focused on resisting the cyclical upswing, and more restrictive prudential regulations.
3. Growth has resumed, but risks being overly reliant on consumption, which would feed external vulnerabilities—especially in the current global environment. Vigilance and timely policy responses are required to avoid rising inflation and an unsustainable widening of the current account deficit in a strong capital–inflows environment, particularly if these flows are mostly short term.
B. Recent Developments and Outlook
4. The Turkish economy recovered quickly from the precipitous drop in output triggered by the global crisis. Globally-synchronized capital outflows and a sharp decline in confidence led GDP to fall by a seasonally adjusted 12 percent during Q4 2008-Q1 2009. Inflation and the current account deficit declined markedly on falling commodity prices and a widening output gap. Temporary tax cuts, an unprecedented reduction in policy interest rates, and deep price discounts fuelled a rapid recovery of demand from the second quarter, which contained the annual decline in GDP to 4¾ percent. Recently, increased indirect taxes and other price shocks and the rebound in demand and

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Published by: EurasianObserver on May 28, 2010
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