Turkey remains vulnerable to a sudden slowdown or stop in capital inflows, and failure to address its imbalances could lead to 'systemic distress,' slowing the country's growth, IMF staff warned in a report.
The International Monetary Fund has long called for Turkey to tighten its monetary policy to address a large current account deficit and "excessive" credit growth, and repeated its warnings in a detailed staff report that was prepared in November and released on Friday.
"Given the size of Turkey's current account deficit, a sudden stop in inflows (one sharper and more sustained than the one seen in recent months) would require a large compression in absorption to close the external deficit, leading to negative GDP growth," IMF staff said.
Provided things do not get worse, the IMF has estimated Turkish economic growth of 3.8 percent this year and 3.5 next year, while the current account deficit is seen narrowing to 7.2 percent of GDP next year from 7.4 percent expected this year.
Turkey's economy has been hurt this year by expectations that the U.S. Federal Reserve would begin to stem a flood of U.S. dollars that has boosted global emerging markets. Turkey's central bank has sold dollars regularly to prop up its lira currency and keep a curb on domestic inflation.
The lira fell to record lows on Friday rattled by domestic political tensions and the Fed's decision to start trimming its monetary stimulus program, prompting the Turkish central bank to threaten more market action.
(Reporting by Anna Yukhananov)