Turkey’s economy has grown by a remarkable 6 percent on average since 2010, however high inflation and a large external deficit is holding back the continuing growth potential, according to the IMF in their 2014 Turkey report.
"Growth is set to continue, albeit at a moderate pace. In 2014, Gross Domestic Product is expected to grow at 3 percent, driven by public sector support, net exports, and a mild revival of private consumption in the later part of the year," the report prepared by the IMF staff visiting Turkey between September 11 and 24 said.
The report listed the dependence on consumption, slow export growth and sizable investment needs as the elements constraining Turkey's growth, and added that the monetary stance needs to be consistent with the inflation target.
"The current policy rate is not compatible with reducing inflation to the 5 percent target," the report said, adding that a tighter fiscal stance would reduce the burden on monetary policy to meet the inflation target.
"Without a change in policies, future economic performance is likely to be weaker than that of the recent past. Turkey’s low domestic savings and challenges related to competitiveness are becoming limiting factors for investment and exports. Thus, on current policies and national saving rates, economic growth is expected to slow to about 3.5 percent per year in the medium term," the report said.
Although lower growth would likely limit inflation and the deterioration of the current account deficit, it would also mean that Turkey’s income convergence with advanced economies would be slow, potentially leaving Turkey in a middle income trap, it also said.
The report concluded saying the structural reform policy agenda also needs to be revitalized.
"Macroeconomic policies can support rebalancing and preserve financial stability in the near term, but improved medium-term growth will also depend on progress with structural reforms aimed at enhancing Turkey’s economic potential. The priority should be to implement the policies that encourage higher private sector savings, and promote lower energy dependence," it said.