Turkey recovered swiftly from the global financial crisis but sizeable macroeconomic imbalances
arose in the process. High consumer price inflation and a wide current account deficit are sources of
vulnerability. Even though below-potential growth helps rebalancing and disinflation, these imbalances
endure. The financial sector still looks resilient thanks to buffers built up mainly prior to the financial
crisis. However, private sector balance sheet risks have gained prominence as leverage increased.
Macroeconomic and structural policy levers need to steer a passage between robust but externally
unsustainable growth and externally viable but low growth. Monetary policy needs to bring inflation and
inflation expectations closer to target. Macroprudential policies could more systematically lean against
capital inflows and credit cycles to reduce private sector balance sheet vulnerabilities. The fiscal stance is
broadly appropriate, but compliance with a multi-year general government spending ceiling would help
avoid pro-cyclical loosening in case of revenue surprises and help boost domestic saving. Overall, policies
should help reduce the risk of disruptions in capital flows as monetary policy stimulus is being withdrawn
in the United States.
