Turkey

Date: 5 May 2011

Country briefing note      <download pdf file>

Economy stages strong recovery in 2010 but some slowdown is expected in 2011

•  The economy of Turkey , whose trading links are primarily with European Union countries, contracted sharply in 2009 due to the global economic crisis.

•  The sound macroeconomic policy and reforms carried out in the past, however, helped to limit financial system stress by keeping the balance sheets of banks and households strong and successfully containing interest and exchange rate volatility. Business and consumer confidence remained high, which helped the economy to grow faster.

•  The economy grew by 8.1% in 2010, aided by a strong recovery in domestic and external demand, as well as a surge in private investment. The relaxation of fiscal, monetary and financial policies also contributed to the recovery.

•  Turkey may face a slowdown in GDP growth to 5.0% in 2011 as external demand softens.

High inflation is a major challenge as food prices rise rapidly

•  Inflation in Turkey also picked up, rising to 8.6% in 2010 as compared to 6.3% in 2009. Large excise tax increases and food price shocks in early 2010 caused a temporary spike in inflation that also raised inflationary expectations. Food prices witnessed sharp increases and volatility over the year.

Budget balance improved in 2010

•  In Turkey , the budget deficit fell to 3.3% of GDP in 2010 from 5.5% of GDP in 2009, helped by indirect tax increases, the favourable impact of low global and domestic interest rates on borrowing costs and the rise in tax revenues resulting from a solid recovery in economic activity.

Exports revive but imports grow more rapidly

•  In Turkey , strong growth in imports widened the current account deficit from 2.3% of GDP in 2009 to 5.9% of GDP in 2010.

•  Containing this external imbalance by avoiding a heavy dependence on potentially unstable external financing will be important for sustained economic recovery, given the uncertain global outlook.

Some major policy challenges

•  High inflation rates can compromise the achievement of sustained high growth rates. Containing inflationary pressures should therefore be a priority in the policy agendas of governments.

•  A combination of monetary, fiscal and other measures is needed to reduce price pressures. Repeated supply shocks pose a constant challenge to sustaining a low inflation regime. A more medium-term approach is needed in order to augment the supply of items of mass consumption by addressing structural supply constraints.