Overview

Country Context

TURKEY

2015

Population, million

76.8

GDP, current US$ billion

721.1

GDP per capita, current US$

9387

Poverty Rate (US$5/day 2005 PPP terms) (2014)

18.3

Life Expectancy at Birth, years (2014)

74.6

Turkey’s performance since 2000 has been impressive. Macroeconomic and fiscal stability were at the heart of its performance, enabling increased employment and incomes and making Turkey an upper-middle-income country. Poverty incidence halved over 2002–12, and extreme poverty fell even faster. During this time, Turkey urbanized dramatically, opened up to foreign trade and finance, harmonized many laws and regulations with European Union (EU) standards, and greatly expanded access to public services.  It also recovered well from the global crisis of 2008/09.

Developments since 2012 raise concerns about Turkey’s capacity to sustain progress.  Growth has slowed, per capita income has stagnated around US$9,000 per annum, unemployment is rising, and reform momentum has been uneven. Turkey’s macroeconomic achievements have also been challenged by an uncertain outlook. 

Slow growth in Europe and a deteriorating geopolitical environment in its neighborhood have negatively impacted exports, investment, and growth. The influx of 3 million Syrian refugees in 2015–16 created new social, economic, and political demands, particularly in urban centers where most refugees are living.

Political developments in 2015 and 2016 have presented further challenges. Elections in June and November 2015, a cabinet reshuffle in May 2016, an attempted coup in July, and the consequent replacement of public officials have all affected the Government’s reform momentum. At the same time, a series of terrorist attacks has weakened tourist arrivals and foreign investment. Private investments have been delayed, leading to slower economic growth.

The Government will need to take strong measures to address continuing structural vulnerabilities, revitalize private investment, boost growth, and resume Turkey’s convergence with Europe. Most notably, new momentum is needed to improve the quality of education and boost productivity.

 

Last Updated: Oct 05, 2016

Strategy

Number of active projects

11

Net IBRD commitments

$4.2 billion

Trust fund portfolio

$257.9 million

Turkey and the WBG have a strong partnership that is based on Turkey’s National Development Plans (NDPs). The 10th Development Plan (2014–18) outlines the priority development areas for the Government, and the WBG’s current and future programs aim to support key aspects of this plan.

The WBG is preparing a Systematic Country Diagnostic (SCD), which has been shared with the Government and will soon be finalized. This SCD discusses the main challenges to reducing poverty and sustaining growth in Turkey. The SCD and NDP both provide a strong foundation for the new WBG Country Partnership Framework (CPF) that is under preparation.  The CPF will outline the WBG’s strategy for FY17–21 and articulate the main areas of WBG engagement, both technically and financially.  

Key Engagement

Turkey is the sixth-largest borrower of the International Bank for Reconstruction and Development (IBRD) in terms of debt outstanding. The investment portfolio and pipeline support the energy sector, financial and private sector development, urban development, and health care. Under the current Country Partnership Strategy (CPS) FY12–16, total IBRD lending has reached US$4.3 billion. Throughout the CPS period, project implementation has been smooth, meeting disbursement targets and development objectives.

Turkey values the WBG’s analytical and technical knowledge work. A growing area of common interest is sharing Turkey’s experiences with other developing countries. In December 2014, the Bank launched a report, “Turkey’s Transitions: Integration, Inclusion, Institutions,” which looks at the lessons Turkey has learned over the past 30 years. An extensive series of knowledge products aim to inform policy discussions in various areas (education, health, labor, and energy) and are the Bank’s primary instrument for engaging and broadening ownership through joint preparation and close cooperation with all stakeholders. 

A key engagement also concerns the Syrian refugees living in Turkey. The WBG is currently providing assistance in the areas of social support and adaptation, labor markets and the economy, and education, as well as in the cross-cutting areas of data collection, measurement, and monitoring.   

 

Last Updated: Oct 05, 2016

Economy

RECENT ECONOMIC DEVELOPMENTS

GDP growth slowed to 3.7% in the first half of 2016 from 4% in 2015, due to weakening exports and private investment. Private consumption and government spending rose, making a strong contribution to growth. By contrast, private investment disappointed following the 2016 elections, as underlying structural weaknesses remained unaddressed. Imports recovered, thanks to a stable lira and stronger consumption, while export growth remained weak because of geopolitical problems and Russian sanctions. 

External adjustment, driven by lower oil prices, has slowed significantly as tourism revenues have fallen. Although Turkey’s energy bill shrank, the 12-month current account deficit declined by only US$2.8 billion to US$29.4 billion by June 2016.

Headline inflation has been volatile, due to erratic food prices, but core inflation has come down. A stable lira eased the pressure on prices of imported goods so that 12-month core inflation declined from 9.5% in December 2015 to 8.4% in August 2016. 

Despite high inflation, the central bank lowered the overnight lending rate by 225 basis points between March and August, bringing the average cost of funding to around 8%. Aiming to support the economy following the failed coup attempt, it also lowered reserve requirement ratios for all maturities in August and September. 

Headline fiscal figures improved in the first half of 2016, but there are concerns about the underlying dynamics. A significant decrease in capital and interest expenses mostly offset the rise in current transfers and the wage bill. Tax revenue growth has been slower than in 2015, but an increase in non-tax revenues has led to an overall improvement in budget revenues. 

The population with per capita expenditure below the poverty line (US$5/day in 2005 PPP) and extreme poverty line (US$2.5/day) continued to fall, mainly due to higher wages, better access to jobs, and enhanced social assistance.

A 30% increase in the minimum wage was approved in January 2016. A recent labor force survey suggests that the increase in labor costs has had no short-term impact on employment creation but may change the composition of total employment toward the informal sector.

ECONOMIC OUTLOOK

Private investment is forecasted to weaken this year, with investor confidence remaining fragile following the failed coup attempt. Private consumption weakened in the second quarter and is expected to weaken further in the third, as uncertainty encourages consumers to save more.

Yet, the available fiscal space provides ample room for the Government to partially offset weakening private demand and support growth. Against this backdrop, the growth forecast for 2016 has been revised down to 3.1% from 3.5%. A main downside risk now is a possible credit rating downgrade.

With private consumption forecast to grow in the coming years, poverty (extreme poverty) is estimated to decline to 16 (2.5%) in 2016; 15 (2.3%) in 2017; and 14 (2.1%) in 2018. The realization of the trend hinges on the labor market effects of the 30% minimum wage increase. On the one hand, the raise should boost the incomes of the working poor.

On the other hand, it has brought the minimum wage to 40% of the median wage, pushing up firms’ wage bill and discouraging new hiring. In the medium/long term, job creation may slow and its composition may start to tilt toward informality, undoing some of the distributive benefits of the active minimum wage policy.

 

Last Updated: Oct 05, 2016

Highlighted Project

Energy and Climate Change: Turkey’s energy sector reforms have attracted private investment and ensured that capacity has kept pace with needs. New legislation has covered electricity, gas, renewable energy, and energy efficiency; a regulatory authority has been established; energy prices have been reformed; markets have been created for electricity and large-scale natural gas; state-owned energy enterprises have been restructured; and large-scale private sector participation has been encouraged through privatization.

As a result, an electricity market with over 800 participants has been developed. In addition, from 2001 to 2014, over 31,000 megawatts (MW) of market-based, private-sector power generation capacity was commissioned; investors took over the entire power distribution system in 2008–13; and the regulatory framework for renewables and the development of the electricity market facilitated an additional 16,000 MW generation capacity based on renewable sources.

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The WBG is supporting renewable energy development, increased energy efficiency, improved electricity and gas supply security, the financial viability of the electricity sector, and greater private sector investment in energy efficiency and in the sector overall. Turkey was the first country to benefit from the Clean Technology Fund (CTF).

A Development Policy Loan (ESES DPL) series played a central role in supporting the energy sector, enhancing private sector clean technology investments, and integrating climate change considerations into policies and programs. A multi-year, EU-funded, and WBG-administered technical assistance program is currently under implementation to help deepen reforms in the power and gas markets, support energy-efficiency market development, and promote renewable energy policy.

With the Small and Medium Enterprises Energy Efficiency project, the Bank is helping to improve the efficiency of energy use in small and medium enterprises (SMEs) by scaling up commercial bank lending for energy-efficiency investments. The project provides IBRD funds through three financial institutions (FIs) and also seeks to expand their capacity in assessing energy-efficiency investments and to explore alternative financing models tailored to the Turkish SME market.

In addition, the project seeks to enhance the capacity of the Ministry of Energy and Natural Resources (MENR) to meet its mandate and increase the utilization and effectiveness of its energy-efficiency support programs.

 

Last Updated: Oct 05, 2016


LENDING

Turkey: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments