Turkey needs reforms to overcome risks to growth: OECD

ISTANBUL

Turkey needs to bring short- and long-term plans into action to battle against chronic vulnerabilities stemming from domestic demand-focused growth and dependence on foreign finance, OECD says.

With low domestic savings and volatile external competitiveness, Turkish growth is highly dependent on domestic demand and foreign finance, the Organization for Economic Cooperation and Development (OECD) has said in a new report that urges the government to introduce urgent fiscal policies.

“External demand is strengthening, in particular in a context of recovery in the European Union, but high inflation and exchange rate volatility and low productivity growth endure,” the OECD’s Economic Survey on Turkey said, continuing to stress “competitiveness remains fragile and dependence on foreign savings is very high.”

The organization praises the “broad-based and inclusive growth” that continued through and after the global crisis, but warns against the risks stemming from it being too centered on domestic consumption, “which is too much funded by foreign saving.”

The OECD argues the mounted current account deficit, the main pressure on the country’s economy, has been also mounted on this aspect, leading economy managers to introduce measures to curb domestic demand.

Tight stance ‘crucial’

Inflation in Turkey, which is at around 9 percent, well above the government’s long-term target of 5 percent, also “calls for a restrictive monetary policy stance,” the report said.

Turkey manages to reduce these imbalances, but these weaknesses remain the economy’s threatening vulnerabilities, it added.

The prescription suggested by the OECD to cure these chronic weaknesses is shifting the focus of demand from domestic, to external sources.

And to do that “Reducing dependence on short-term foreign debt is key and requires raising domestic saving and attracting more FDI,” the report read.

Therefore, the government should immediately bring measures that will ramp up Turkish companies’ competitiveness in international markets, introduce structural reforms and deliver substantial productivity gains.

The Paris-based organization also lifted Turkey’s growth forecast to 3.3 percent for this year from its previous estimate of 2.2 percent, maintaining its optimism that recently slowed down growth rates will pick up.

“Activity has been held back by tighter financial conditions [see below], but high-frequency indicators, such as business and consumer confidence and industrial production, point to a recovery in domestic demand,” the report argued.

Robust exports fuelled by combined impact of a better external environment and a weaker Turkish Lira also help the country to narrow its wide current account deficit, as well as rebalancing the economy, it also noted.