The International Monetary Fund raised its economic growth forecast for Turkey this year, but warned a recovery from last year’s currency crisis was fragile and the central bank should end a programme of rate cuts.
Turkey’s economy is expected to expand by 0.25 percent this year, the IMF said in a report at the conclusion of an annual review.
“Prospects for strong sustainable growth have weakened and risks remain on the downside,” the IMF said, adding that Turkey remained susceptible to external and domestic risks.
The fund said it was looking forward to the government’s announcement of its New Economic Programme (NEC), due later this month. The plan “should clearly diagnose the challenges facing the economy and outline a comprehensive set of policies to address them,” it said.
Turkey is emerging from a deep economic downturn, led by government stimulus, an upsurge in lending by state-run banks and interest rate reductions. The central bank has slashed its benchmark lending rate by 750 basis points to 16.5 percent since July as inflation slowed markedly.
The IMF said that monetary policymakers should now keep interest rates steady to bolster financial stability.
“The central bank easing cycle has been too aggressive given still-high inflation expectations and the need to mitigate macro-financial risks,” the fund said. “Monetary policy should keep rates on hold until there is a durable downturn in inflation and inflation expectations.”
As well as tight monetary policy, the central bank should boost its reserves of foreign currency and the government should bolster medium-term fiscal strength, the IMF said.
The fund also called on the government to implement “a comprehensive third-party assessment of bank assets and new stress tests, with follow-up measures, as needed, to further strengthen confidence in banks.”
Additional steps were also needed to strengthen the insolvency and corporate restructuring framework, as well as structural reforms to support productivity growth and to increase economic resilience, the IMF said.