Reducing Macroeconomic Imbalances in Turkey

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 Overall, policies should help reduce the risk of disruptions in capital flows as monetary policy stimulus is being withdrawn in the United States.