IMF raises Turkish growth prospects but ‘current calm appears fragile’

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The International Monetary Fund (IMF) increased its economic growth forecast for Turkey on Monday to 0.25 percent, but added that “the current calm appears fragile,” alluding to challenges regarding low currency reserves, high levels of private sector debt, and high external financing needs.

The IMF issued the statement at following its 2019 annual visit to the country.

Turkey had experienced a sharp depreciation in its currency, the lira, and an associated recession in late-2018. The statement pointed to policy stimulus and favorable market conditions as key factors aiding the return of growth.

Despite a recovery in the lira and the country’s current account, the IMF highlighted challenges ahead. “Turkey remains susceptible to external and domestic risks, however, and prospects for strong, sustainable, medium-term growth look challenging without further reforms,” the fund said in its statement.

The IMF also cited concerns in the country’s corporate and banking sector balance sheets. Steps to improve banking assets and strengthen insolvency and corporate restructuring frameworks would help support financial stability and improve the medium- and long-term outlook.

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

The fund added that efforts to expand lending “should be limited and should also ensure that resulting credit is provided only to viable borrowers.” Authorities will also need to be ready to rein in excessive credit growth.

The IMF added that the recent changes reducing reserve requirements for banks, a policy aimed at incentivizing private bank lending, “should be revisited.”