IMF says Turkish economy prone to shocks due to loss of reserves


Turkey’s gross reserves are well below the recommended adequacy range, and net international reserves are negative excluding currency swaps with the central bank.
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Istanbul: The International Monetary Fund forecasts strong growth for Turkey this year, while saying risks increased after reserves fell from previously low levels.

Turkey’s gross domestic product is expected to grow by around 5.75% in 2021 and return to a slower trend next year, the IMF said in a statement on Friday after a so-called review mission under the article IV in the country.

Turkey’s gross reserves are well below the recommended adequacy range, and net international reserves are negative when currency swaps with the central bank are excluded, according to the IMF.

Turkey’s fiscal space is constrained by contingent liabilities and potential debt refinancing pressures, while the pound’s depreciation adds to stress on the balance sheets of non-financial corporations and banks, IMF says .

“Inflation is expected to remain high and reserves continue to decline,” the fund said in an emailed statement. “With high external financing needs, large domestic currency deposits and low reserve reserves, the economy remains vulnerable to shocks and sentiment shifts at home and abroad. “

The fund said domestic risks include premature easing of monetary and credit policies or other political missteps that further erode credibility and buffers. External risks include increases in interest rates in advanced economies and a higher global risk aversion that could expose vulnerabilities as well as vaccination delays and unfavorable geopolitical developments.

Turkish consumer prices rose 16.6% annualized in May, and President Recep Tayyip Erdogan said interest rate cuts could be implemented as early as July or August. The central bank expects inflation to slow from the end of the third quarter and end the year at 12.2%.

IMF executive directors called for further restraining and refocusing credit growth in public banks and monitoring banks’ foreign currency liabilities, the statement said. They also called for structural reforms to counter the impact of the Covid-19 pandemic, increased labor market flexibility and the restructuring of viable, temporarily insolvent companies and the liquidation of non-viable companies.


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