EU finance ministers: Turkey needs push on inflation, labor

ANKARA

The Turkish economy would benefit from a series of reforms, the Economic and Financial Affairs Council of the EU said on Tuesday. 

The council, which brings together the finance ministers of the 28 Member States as part of the European Council, announced the results of its dialogue with Turkey and the Western Balkans in a report which assesses the Economic Reform Program for 2015 submitted by Turkey on March 13.

"Participants consider that the Turkish economy continues to face external and internal imbalances which call for adjustments of macro-economic policies. The implementation of comprehensive structural reforms should be accelerated to unleash the country's full economic potential and to support the reduction of macro-economic imbalances," the report said.

The report criticizes the Turkish central bank: "The central bank's unconventional monetary policy framework, implemented in late 2010, has failed to lower inflation to the 5 percent  target and to anchor inflation expectations. Supply-side factors have contributed to the overshooting of the target. Although price stability is the central bank's primary objective, it has simultaneously pursued secondary, sometimes conflicting, goals," the statement said.

The ministers also called for improvements in the international competitiveness of Turkish goods and services through increased productivity. "In this regard, structural and governance reform is key, including increased labour market flexibility, a better educated and trained labour force, and improvements to the business environment," the report said.

Four recommendations were made. "Participants hereby invite Turkey:

1. to promote domestic saving in view of the persistently large current account deficit. Fiscal policy has an important role to play in this regard by following a sufficiently restrictive stance. Reducing the rigidity of public expenditures would help to make the fiscal policy stance more responsive to macroeconomic needs. The adoption of a fiscal rule would enhance budget transparency, provide an important fiscal anchor and enhance credibility.

2. to continue to take consistent steps to reinforce the focus of monetary policy on the pursuit of price stability, with other policy objectives being pursued with separate measures, and thereby contribute to improving both the functioning and the credibility of the inflation targeting regime.

3. to make sustained efforts to improve the business environment and Turkey's attractiveness as an investment destination, not least for foreign direct investments, in view of the continuing dependence on large capital inflows. This requires wide-ranging reforms, including strengthening the rule of law, making it easier to start businesses, and strengthening competition through continued liberalisation of product and service markets.

4. to accelerate the implementation of a comprehensive structural reform programme. Overall, this is essential to improve the functioning of the markets for goods, services and labour which, in turn, would increase potential growth and international competitiveness on a sustainable basis. In particular, Turkey should upgrade and make better use of its human capital through the pursuit of the education agenda and the deepening and widening of labour market reforms. Specifically, the qualifications of low-skilled workers should be improved through training and female labour force participation should be stimulated through flexible working conditions."