Turkey’s initial policy response to the coronavirus pandemic led to a sharp rebound in GDP but has “exacerbated vulnerabilities”, the International Monetary Fund (IMF) said in a statement issued on January 25 following an “Article IV” mission visit to the country.

Noting Turkey entered 2020 with “pre-existing vulnerabilities”, the IMF said: “Growth over the past decade has been driven in large part by externally-funded credit and demand stimulus. As a result, elevated external financing needs, declining reserves, high inflation, and increasing dollarization set Turkey apart from many of its emerging market peers.”

The early stimulus Turkey brought in as the coronavirus outbreak took hold “relied primarily on rapid monetary and credit expansion, including policy rate cuts, cheap and rapid lending growth by state-owned banks, and administrative and regulatory measures designed to boost credit”, the Fund added, saying: “Despite some fiscal space, direct fiscal measures amounted to just 2.5 percent of GDP, mainly in the form of tax deferrals, but also including employment support. These combined measures helped economic activity rebound strongly in the third quarter to above pre-pandemic levels, with Turkey among the few countries estimated to have posted positive overall growth in 2020.”

The IMF continued: “But this policy response also exacerbated vulnerabilities. Inflation remains well above target, further weighing on policy credibility. Increased dollarization, relatively high imports, and financial outflows triggered large-scale foreign exchange intervention in an attempt to stem lira depreciation.”

Turkey’s recent policy pivot to tighten monetary policy and slow credit growth was welcome, the IMF said, also observing: “From late-2020, monetary policy tightening, the easing of ad hoc regulatory measures, and a marked slowdown in state-owned bank lending helped contain the pressure on the lira and rebuild confidence. Gross reserves have since broadly stabilized, but at a level well below the recommended range, and well below most peers. While net international reserves (NIR) remain positive, once foreign exchange (FX) swaps with the central bank (CBRT) are subtracted, the net position is negative.”

The full IMF statement can be read here.