Turkey is situated at what is often termed the cross roads of Europe and Asia, it is transcontinental and can be termed Eurasian.  The country is made up of Anatolia which includes 97% of the country and is separated from European Turkey by the Bosporus, the sea of Mamara and the Dardanelles, the European area is only 3%. It is the 37% larges country in the world in terms of area.

Turkey is a parliamentary representative democracy and has developed a strong tradition of secularism over the years.  The country has a legal system which has been wholly integrated with the system of continental Europe. For instance, the Turkish Civil Law has been modified by incorporating elements of mainly the Swiss Civil Code, the Code of Obligations and the German Commercial Code.  The Administrative Law bears similarities with its French counterpart, and the Penal Code with its Italian counterpart.

The economy has the world’s 15th largest GDP (by PPP) and the 17th largest nominal GDP, the population as per the 2013 census was 76 million. The currency is the Turkish Lira.

Recent economic data coming out of Turkey indicates an economy that is growing at a rapid rate, however lower national savings and competitiveness continue to restrain investment and exports. The coming 10th development plan contains reforms that are essential to ensure Turkey avoids the “middle income trap”




                Medicaments (includes vetinary)




Past Growth:     The Turkish economy has grown by a staggering 6% on average since 2010 after recovering from the financial crisis, with unemployment at its lowest level for years. In recent years financial volatility and domestic uncertainty have taken place and has with rapid growth been of little concern however the rapid growth has come at the expense of high inflation and a large external deficit.  The imbalances are holding back further growth and will need to be carefully addressed through structured macroeconomic policies and reforms.

Future Growth: A GDP growth rate of 3% is expected in 2014, driven largely by public sector support, net exports and a mild revival of private consumption towards the end of 2014.  Higher inflation though is expected and again will exceed the authority’s target which is a reflection of the exchange rate passing through high food inflation, and some monetary easing.  Although the current deceit is decreasing it will remain elevated

The Financial System: This is well capitalised and capital adequacy ratios are high on average based on high quality capital.  There has been good provisioning for non - performing, loans but there is increasing use by the banks of ample and cheap wholesale funding. At the same time and in tandem the banks have increased their indirect foreign exchange risk through foreign currency lending to non-financial operations

Outlook Risk: The main risk here is the outlook of a sharp decrease in capital inflows to emerging markets.   Turkey has external gross finance requirements of over 25% of GDP which leave it quite exposed to any sudden shifts in capital flows which could lead to a costly adjustment of the real economy. Within the private sector there is high leverage, and it is increasing and this means buffers to withstand shocks may have been reduced.  If the imbalances are allowed to increase, and the authorities continue to be slow in the creation of additional policy space to respond to shocks then the more costly the adjustments will become.

Fiscal Policy:  If this was tightened than it would be a major contribution to the reduction of external imbalances and would relieve pressure on monetary policy.  Government non-interest current expenditure has been growing faster than the economy which is stimulative, however the structural balance has been deteriorating in recent years although debt sustainability is not a concern.  Tighter fiscal policy would reduce the burden at present on monetary policy to meet the inflation target.  The result here would be a rebalancing of the economy away from consumption, support private investment and improve the competitiveness of the private sector. In additional a stronger public sector position would create extra space to react as shocks to private sector become more stretched.  The recommendation here is a front-loaded fiscal adjustment to reach 2% of GDP primary surplus by 2017.  Achievement would be through containing non-investment current expenditure and preserving investment in economically sound projects.

Monetary Policy: This needs to be consistent with the inflation target of 5% and it is not.  There is a need for monetary policy to focus on the target by sustaining a positive real policy interest rate so as to anchor expectations and lower inflation to the targeted rate.  If the fiscal stance was tighter the monetary effort to achieve the inflation rate would be smaller.

International Reserves: The level here is in line with international standards, however it is below levels seen in peer countries. Net reserves are low and this would provide a limited buffer in the case of long periods of exchange rate volatility. The central bank should bolster its net international reserves by way of sterilized interventions as market condition permit.

The Medium Term: From a medium term point of view the structural reform policy agenda needs revitalizing.  Implementation of macroeconomic policies can support rebalancing and preserve financial stability in the near term. In the case of medium term growth, this will depend on structural reform progress accompanied by structural reforms aimed at enhancing Turkey’s economic potential.

Source: IMF and Turkish authorities




John Brooks



6 October 2014