The International Monetary Fund (IMF) on September 23 sharply raised its forecast for Turkey’s economic growth this year from -2.5% to 0.25% but at the same time said of the country’s post-currency crisis financial markets that the “the current calm appears fragile”.

In a report released after the annual visit to Turkey paid by its staff, the IMF cited anxieties about bad debts in the country’s corporate sector, low foreign currency reserves and heavy reliance on foreign financing, as well as a new problem, namely a growing fiscal deficit.

“Growth has rebounded, aided by policy stimulus and favourable market conditions, following the sharp lira depreciation and associated recession in late-2018,” the IMF said. “The lira has recovered and the current account has seen a remarkable adjustment.”

However, the institution said Turkey “remains susceptible to external and domestic risks” while “prospects for strong, sustainable, medium-term growth look challenging without further reforms”.

Ramping up credit supply
Turkish President Recep Tayyip Erdogan wants Turkey to quickly return to fast-paced growth and has targeted a 5% GDP expansion in 2020. The executive president is attempting to ramp up the supply of credit, all the while pressing the central bank for a series of quick and substantial interest rate cuts. The national lender is in turn continuously incentivising the banks to make more loans.

The IMF also took the view that the central bank’s decision to slash rates by 750 bp since July was “too aggressive”. It further advised that the reduction made in reserve requirements for banks that meet certain lending targets “should be revisited”.

Attempts to expand lending, the IMF said, “should be limited and should also ensure that resulting credit is provided only to viable borrowers”.

Turkey’s credit-fuelled economy has grown by an average of more than 5% annually over the past 15 years, during which period Erdogan has been at the helm.

The economy contracted 1.5% in the second quarter, marking the third straight quarterly year-on-year contraction, but leading economic indicators have lately provided signs of economic recovery with reduced lira volatility and slowing official inflation. That’s not to forget of course that a lot of the data coming out of national statistical institute TUIK is being questioned by the opposition and some economists.

The IMF also remarked that additional steps to clean up bank and corporate balance sheets would support financial stability and stronger and more resilient growth over the medium term. Turkey’s banking watchdog last week told lenders to write off Turkish lira (TRY) 46bn ($8.1bn) of loans by the end of the year and provision for loss reserves, in a move targeted mostly at the hard-hit energy and construction sectors.

Row over delegation’s meetings
The visit to Turkey by IMF staff was marred at its end by a row after, in a separate statement, the institution said its delegation met with representatives from the private sector, political parties and think tanks to obtain a broader view of economic developments in Turkey.

The Turkish finance ministry criticised the delegation’s meetings, saying they took place without notice. The ministry said it found it inappropriate for the IMF to conduct other meetings in Turkey without its knowledge.