Press release: Turkey should rebalance growth through monetary and financial policies that keep inflation, exchange rates and credit levels on sustainable paths, the OECD said
Turkey’s business sector dynamism has underpinned strong and inclusive growth in the 2000s, even though well-being indicators suggest there remains ample room for improvement. Economic performance has been supported by robust public finances and a resilient banking sector. However, with low domestic saving and volatile external competitiveness, growth is highly dependent on domestic demand and foreign finance.
Rebalancing growth by achieving financial stability and curbing inflation
External demand is strengthening, in particular in a context of recovery in the European Union, but high inflation, exchange rate volatility and low productivity growth endure. Competitiveness remains fragile and dependence on foreign savings is very high. Monetary and financial policies aim at disinflation while keeping the exchange rate and credit growth on a sustainable path, but inflation is well above target and private debt levels have risen substantially, albeit from a low level. Credit to SMEs and foreign currency borrowing by large firms have both expanded rapidly, which may increase financial risks. However, the authorities have increased their efforts to keep household debt in check and so far, household and commercial loan default rates have remained low. To help rebalance demand, further improvements in external competitiveness are indispensable. In this regard curbing inflation is essential, calling for a restrictive monetary policy stance.
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Preserving the credibility of public finances
Public finances strengthened considerably over the past decade, which has boosted Turkey’s international credibility. While the overall fiscal position appears robust, public spending has increased considerably, in particular for education, health and pensions. Demographic trends, active social policies and large infrastructure projects will put additional pressure on public spending. Accrual-based general government accounts need to be aligned further with international standards, and fiscal and quasi-fiscal transactions associated with public-private partnerships need to be reported more systematically.
Fostering structural change, productivity growth and trust in a rule-based business environment
Businesses range from myriad micro, low-productivity firms to a small core of modern, high-productivity corporations. The regulatory framework burdens expanding firms with costly employment, tax and other obligations. Uneven compliance with laws deepens business sector segmentation and tends to weaken trust. As a result, institutionalised enterprises face obstacles to growth. Despite ever-greater government incentives to promote formal businesses and investment in selected regions and sectors, resources do not flow enough from lower to higher-productivity activities. All these factors inhibit productivity growth and entrench a social divide between the earnings, work conditions and human capital development prospects of workers in different segments of the business sector. Stronger trust in a rule-based business environment would encourage faster growth of foreign direct investment firms, which would contribute to productivity gains, inclusive growth and non-debt creating absorption of foreign savings.
For further information please contact the Turkey Desk at the OECD Economics Department.
The OECD Secretariat's report was prepared by Rauf Gonenc, Oliver Roehn, Fethi Öğünç and Evren Erdoğan Coşar under the supervision of Vincent Koen. Research and editorial assistance was provided by Béatrice Guérard.