IMF’s Turkey report is thinly veiled censure of Erdoğan’s economic management

The International Monetary Fund has published an annual report on Turkey that represents a thinly veiled condemnation of the economic policies of President Recep Tayyip Erdoğan’s government.

While increasing its economic growth estimate for Turkey this year to 0.25 percent, the Washington D.C.-based institution had virtually nothing positive to say about how Erdoğan has handled the economy following last year’s currency crisis.

In fact, the report, published this week following a regular staff mission, mentions the word “positive” three times – once when referring to general market sentiment and twice when outlining its predictions for economic growth.

In its three-page summary of the mission’s findings, the fund criticised the short-sighted policies of the government, which it said were aimed at driving forward economic growth at the expense of financial stability.

“Prospects for strong sustainable growth have weakened and risks remain on the downside,” the IMF said. “The current calm appears fragile.”

It seems clear that the government had prior knowledge of the report’s content. The IMF said in an introductory paragraph that the authorities had consented to the publication of the statement.

Turkey’s displeasure at the document’s content was clear. An orchestrated campaign by Turkey’s pro-government press against the IMF, focusing on alleged meetings between fund officials and representatives of opposition parties – the Republican People’s Party (CHP) and the Good Party during the regular staff mission – was launched immediately prior to the report’s release.

The campaign – which depicted the meetings as clandestine and ill-intentioned - was built on statements by government spokesman Ömer Çelik, the Treasury and Finance Ministry – run by Erdoğan’s son-in-law Berat Albayrak – and the IMF’s Turkish director Raci Kaya, an ex-chairman of a state-run bank who represents the interests of Turkey and seven other countries at the fund.

The IMF warned in the report that Turkey’s economic growth had largely been driven by expansionary fiscal policy and rapid state bank credit provision. It then went on to list Turkey’s economic vulnerabilities, which included low foreign currency reserves, high foreign exchange debts, stressed company balance sheets, high dollarisation, a widening budget deficit and weaker domestic sentiment.

In comments that may have further angered Erdoğan, the IMF called on the central bank to halt a series of rate cuts – it has lowered the benchmark lending rate by 750 basis points to 16.5 percent since July – to underpin financial stability and help the economy combat any deterioration in sentiment towards emerging markets.

“The central bank easing cycle has been too aggressive,” the fund said.

The central bank has slashed interest rates after Erdoğan sacked and replaced its governor in July, saying he had refused government requests to cut them. Erdoğan maintains that lower rates help slow inflation, a view that jars with conventional economic wisdom.

“The main policy challenge is to move from a short-run growth focus to securing stronger and more resilient growth over the medium term,” the fund said in the report.  

The IMF then set out a recommended “to-do” list for Erdoğan’s government to ensure that the recovery from last year’s currency crisis ends up being a sustainable one.

The list includes:

1. Tight monetary policy to boost the central bank’s credibility, underpin the lira and slow inflation durably.

2. Steps to bolster medium-term fiscal strength and credibility (the government has drawn on tens of billions of liras in central bank cash this year but the budget deficit has still widened by an annual 34 percent).

3. A comprehensive third-party assessment of bank assets and new stress tests, with follow-up measures if needed, to strengthen confidence in the finance industry.

4. Strengthen the insolvency and corporate debt restructuring framework.

5. Implement structural reforms to support growth in productivity and to increase economic resilience. The measures should include widening the tax base, income tax reform, better monitoring of private-public partnerships and more labour market flexibility and mobility.

The fund also called on the central bank to “revisit” recent measures that incentivise bank lending with reserve requirements – the bank has provided financial rewards to lenders who boost annual lending growth by between 10 percent and 20 percent, while penalising those who do not.

In another thinly veiled criticism of Erdoğan’s policies, the fund said governance of the Turkey Wealth Fund (TWF) should be “refined to limit potential conflicts of interest”. The TWF, which manages Turkey’s biggest public enterprises away from parliamentary oversight, is chaired by Erdoğan. Albayrak is the deputy chairman.

The fund said that it expected Albayrak to set out a detailed reform plan when he announces the country’s New Economic Programme (NEP) later this month.

“We look forward to the forthcoming New Economic Programme, which should clearly diagnose the challenges facing the economy and outline a comprehensive set of policies to address them,” the IMF said.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.