OECD Economic Surveys: Türkiye 2023

Executive summary

Growth has been strong, but vulnerabilities are rising

The economy has recovered fast from the COVID-19 pandemic. However, macroeconomic policies and high commodity prices have contributed to the surge in inflation, with growing external imbalances and implicit liabilities.

Real GDP rebounded by 11.4% in 2021 and was up 6.2% in the first three quarters of 2022. Private consumption and exports have been the main drivers of economic growth. Favourable labour market developments and credit conditions have supported private consumption. Many people have returned to the labour market, particularly youth and women, whose labour force participation now exceeds pre-pandemic levels. Turkish exporters have been able to exploit opportunities from disruptions of the Asian supply chains, relying mostly on large spare capacities. Gross investment has been subdued, however.

Figure 1. Türkiye has experienced a strong economic recovery

Source: OECD Economic Outlook: Statistics and Projections (database).

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Inflation has risen to a 20-year high, exacerbated by global supply constraints and buoyant domestic and external demand. In 2022, consumer price inflation stood at 72.3% (Figure 2) and producer price inflation exceeded 128%. The sharp rise in energy prices – Türkiye is a net importer -- and other commodity prices triggered by the pandemic and subsequently Russia’s war against Ukraine contributed significantly to overall inflation. Lira depreciation has added pressures on import prices.

The central bank has cut its base rate by 10 percentage points since September 2021. It has also relied on a new approach to monetary policy, with special arrangements and differentiated macro-prudential rules, to direct loans to productive and exporting sectors. As a result, credit conditions have tightened for some sectors.

Figure 2. Inflation has soared

1. Producer price index refers to domestic industrial activities.

Source: OECD (2022), OECD Monthly Economic Indicators (database); and Turkstat.

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Looking ahead, growth is projected to slow to around 3% per annum (Table 1). Weak external demand and persistent geopolitical uncertainties will weigh on investment and export growth. Consumer price inflation is projected to decline somewhat due to base effects but to exceed 40% over the projection period, reflecting gradual pass-through of recent lira depreciation, producer price inflation and wage increases. High inflation will dent household purchasing power and private consumption will slow.

Table 1. Growth is declining

	2022	2023	2024
Gross domestic product	5.3	3.0	3.4
Private consumption	15.2	4.1	3.4
Gross fixed capital formation	2.8	2.8	3.8
Exports	12.2	4.4	4.2
Imports	4.2	4.8	3.6
Unemployment rate	10.7	10.3	10.0
Consumer price index	72.3	44.6	42.1
Current account (% of GDP)	-5.6	-3.8	-2.5

Source: OECD Economic Outlook 112 database.

Risks are unusually high and tilted to the downside. The current account deficit is expected to be around 5½ per cent of GDP in 2022 and its funding has shifted from relatively stable sources to more volatile ones. Further pressures on the Lira could turn the exchange rate protection on deposits into an additional liability for public finances, with adverse effects on inflation and confidence.

To bring inflation back to target, the central bank should raise its policy rate. Increasing confidence in the independence of the central bank is vital. Changes to the central bank’s board have been frequent. Inflation expectations have remained well above target, and the lira has lost more than half of its value vis-à-vis the dollar since the start of 2021.

Türkiye should systematically cover risk scenarios and implicit liabilities in its annual Fiscal Policy Reports. Prudent fiscal policy has been a crucial policy anchor over the past two decades in Türkiye and public debt is relatively low as a share of GDP. However, contingent liabilities are expanding, including from public-private partnerships (PPPs), raising Türkiye’s vulnerability to shocks. The burden on the budget may increase significantly, since such PPP projects have guarantees for foreign-currency-denominated payments. The new guaranteed lira saving deposit scheme also generate contingent liabilities. Spending efficiency should improve and the revenue base should be broadened. Türkiye has one of the lowest tax-to-GDP ratios in the OECD.

The government should continue to address the adverse distributional impacts of higher energy prices while preserving fiscal sustainability. The government is supporting lower-income households suffering from rising living costs. This support is warranted but should be temporary and targeted to the most vulnerable to keep fiscal costs manageable. It should also be designed in a way that avoids distorting price signals. The authorities should assess the pros and cons of existing price subsidies and gradually replace them by better-targeted social transfers to vulnerable households.

Making the business climate more friendly to investment

Inward FDI and equity investment have slowed in recent years and are low in international comparison. At the same time, the contribution of total factor productivity to GDP growth has decreased over the past decade reflecting barriers to effective resource allocation. Going forward, faster income convergence will require addressing underlying structural weaknesses associated with competition and regulations. This would improve the business climate and enable resources to flow to the most promising activities and firms.

Figure 3. Product market regulations are stringent

Source: OECD Product Market Regulation database 2018.

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There is a need to promote more open competition in product markets. Strict regulations shield incumbents from competition and limit the entry of new firms. Particularly, complex and burdensome administrative procedures to obtain permits, licences or concessions, hamper the creation of formal businesses. Türkiye should consider creating a one-stop shop issuing all licenses and authorisations. There is also room to ease barriers to international trade and investment, particularly restrictions on foreign ownership, which are stricter than in other countries.

Labour market regulations hamper the creation of more and higher quality jobs. Despite progress over the past decade, a considerable share of the workforce, in particular women and youth, still do not actively participate in labour markets. Even though informality has decreased significantly over the past decade, it remains high, particularly among youth, refugees and women. Rigid labour regulations and an expensive severance pay system provide protection to those with a formal job against the fallout of an economic crisis. However, they impede formal job creation for those currently without one. High labour tax wedges and high minimum wages relative to median wages discourage formal job creation. Minimum wages are set at the national level while ample disparities in living standards across regions prevail. Better protecting people, by giving the unemployment insurance system a larger role and by improving the scope and quality of active labour market policies, is a prerequisite for introducing much needed labour market flexibility.

Figure 4. The employment rate is low

15-64 year-olds, 2021

Source: OECD (2022), OECD Labour Force Statistics (database).

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Promoting skills and innovation to unleash technological progress

Innovation performance lags behind other OECD countries and there are indications that technological upgrades to production have slowed over the last decade. This is linked to poor educational outcomes and important skills mismatches. Moreover, spending on research and development (R&D) remains low in international comparison, despite an almost doubling over the past decade.

Despite considerable improvements in tertiary and secondary enrolment, around 40% of youth do not complete upper secondary education. Learning outcomes for 15 year-olds are below the OECD average. Moreover, important skill mismatches have emerged, with the number of unfilled vacancies increasing despite high unemployment. While skill shortages are most prevalent for medium-level skills, blue-collar work suffers from a poor reputation. The recent initiative to provide a free-to-use website that allows to compare the labour market prospects of higher education programmes may help reduce skills mismatches.

Increasing the provision and broadening the access to quality early childhood education would help improve educational outcomes. It would also pave the way for women to participate more actively in the labour force. Currently, the labour force participation rate of women is very low and women take up most of childcare and other housework.

Support for innovation needs strengthening. R&D support programmes should be redesigned if they prove to be inefficient and additional support be provided where needed. In particular, schemes that promote collaborative research projects between universities and companies should be reinforced.

Promoting the green energy transition

Greenhouse gas emissions per capita are low in international comparison but have grown fast in recent years. Coal accounts for around one third of Türkiye’s total greenhouse gas emissions.

Türkiye has promoted renewable energy, with capacity doubling over the past decade. Government policies have been supportive, including via preferential feed-in tariffs, procurement auctions for renewable energy, support to investment and subsidies for rooftop solar installations. Still, much of the potential remains unexploited. The first nuclear power plant is under construction and is expected to meet around 10% of total electricity needs.

Coal combustion accounts for almost a third of electricity generation. Gradually phasing out coal-fired power is essential to achieve the government’s net zero target. Still generous support to the domestic coal sector should gradually be reduced.

Carbon emissions are priced below the levels seen in most other OECD countries. Türkiye does not have an explicit carbon pricing system and effective carbon prices consist mostly of fuel excise taxes. A large share of greenhouse gas emissions from energy use in the electricity and industry sectors is not taxed.

Main findings and key recommendations

MAIN FINDINGS	KEY RECOMMENDATIONS
Implementing a rules-based macroeconomic policy framework
As in other countries, supply-side constraints and energy prices have put pressures on prices. Lira depreciation and low interest rates have further contributed to high consumer price inflation. In 2022, the CPI stood at 72.3% and inflation expectations far exceed the 5% policy target. Frequent changes in the central bank’s board members have undermined domestic and international confidence in the independence of the central bank.	Tighten monetary policy, including by increasing the main policy rate. Strengthen confidence in the independence of the Central Bank, including by reducing the turnover of the Bank’s board members.
Although public debt is internationally low, it was on an upward trajectory. Fiscal pressures may intensify in the future. Inflation has a particularly negative effect on low-income groups as food and energy tend to account for a larger share of their budget.	Where needed, provide targeted and temporary fiscal support to vulnerable groups. Bring the primary fiscal balance back to a 1% surplus. Adopt a medium-term fiscal strategy to prepare for long-run fiscal challenges.
Rising contingent liabilities are making the economy more vulnerable to economic shocks. Foreign currency-denominated payment guarantees for public private partnerships (PPPs) and foreign exchange-protected deposits are exposing public finances to exchange rate risks. These deposits (amounting to about 10% of GDP) can have a large fiscal cost. As of November 2022, these costs stood at 0.6% of annual GDP.	Further strengthen the framework for supervising and monitoring PPPs by introducing generic PPP legislation. Gradually phased out foreign exchange-protected deposits. Publish annual Fiscal Policy Reports, with short and longer-term projections and risk scenarios for liabilities, including contingent ones.
Making the regulatory framework more effective and predictable
Product market regulations are stringent. The licensing and permits system is the most restrictive in the OECD as are entry barriers and administrative burdens on start-ups.	Create a one-stop shop issuing all licenses and authorisations. Apply the “silence-is-consent” principle to reduce the administrative burden related to obtain permits and licences.
The perception of corruption is high and has deteriorated in recent years. Türkiye has not yet a dedicated whistle-blower protection law or anti-corruption body.	Adopt an anti-corruption strategy underpinned by credible action plans. Establish a permanent and independent anti-corruption body.
Boosting labour market prospects of women
Formal employment rates of the youth and women lag behind. Labour force participation of women is the lowest across the OECD.	Continue to bring more women into formal employment, including by reallocating funds devoted to wage subsidies to well-designed hiring subsidies targeted at the most vulnerable groups.
Public spending on primary education is below OECD average while the population is relatively young and educational outcomes lag behind. High private spending on primary education exacerbates inequalities of opportunities.	Increase and broaden the provision of quality early childhood and primary education.
Creating more and better jobs
Rigid employment rules, including for fixed-term and temporary work agency contracts, are contributing to the widespread use of informal and semi-formal work practices.	Make permanent work more flexible and increase the scope for fixed-term and temporary work contracts, while ensuring social protection of workers and access to reemployment services.
The severance pay system makes formal job creation very costly and, since it is bound to the current employer, hampers the reallocation of labour to more promising activities and businesses. Unemployment insurance fails to provide sufficient social protection to all workers.	Shift social protection from the severance pay system to a broader-based unemployment insurance. Introduce portable severance accounts.
A high minimum wage, relative to median wages, reduces the prospects for low-income workers to obtain formal employment, particularly for women and young workers.	Ensure that statutory minimum wages are affordable for firms, for example by setting a minimum wage floor at the national level and promoting collective bargaining at the enterprise level.
Promoting the building up of human capital and innovation
There are significant shortages regarding middle-level skills. Middle-level jobs suffer from low reputation. The government has recently introduced innovative tools to assess educational institutions’ outcomes and disclose results to the public to steer choice.	Enhance up-to-date information on labour market outcomes for graduates from vocational education tracks, for example by extending the Career Counselling System.
Making growth more sustainable and greener
Coal accounts for about one third of total greenhouse gas emissions in Türkiye. Greenhouse gas emissions per capita are low in international comparison but have grown fast in recent years. The implicit carbon price is lower than in other OECD countries and a large share of carbon emissions are not taxed, in particular in the electricity sector.	Make emission pricing more consistent across sectors, including by gradually scrapping various subsidies to coal and raising the carbon price. Replace coal subsidies for poorer households by means-tested income support programmes without linking aid to fossil fuel consumption.