Turkey’s economy is vulnerable to domestic developments and external shocks, the Organization for Economic Cooperation and Development said Friday, calling on the Turkish government to enact reforms.

In its first economic survey of Turkey since 2014, the OECD said the government in Ankara must boost the country’s low domestic savings rate, strengthen the rule of law, fight corruption, and curb credit-driven consumer spending among other measures.

Still, the Paris-based think tank said Turkey’s gross domestic product would rise by 3.9% this year and 3.7% in 2017, adding that the country’s economy has managed to overcome geopolitical tensions led by the Syrian conflict and resurgent terrorist attacks inside Turkey.

While highlighting that Turkey ended a history of boom-and-bust cycles following its 2001 financial crisis, the organization warned the country is still heavily reliant on foreign-financed domestic demand for growth.

“The economy remained resilient under very adverse circumstances and stronger growth is within reach,” the OECD said. “To achieve strong and sustainable growth, domestic saving should be increased and demand rebalanced between domestic and external sources.”

Turkey’s economy expanded by 4% in 2015, in line with the OECD’s 2014 forecast, and beat analyst expectations with 4.8% growth in the first quarter of this year on the back of strong domestic demand.

China’s slowing economy, U.S. Federal Reserve interest rate increases and sluggish economic recovery within the European Union—Turkey’s biggest export market—also pose threats to Turkish GDP growth, the OECD said. The organization urged Turkish officials to promote structural reforms to promote high-value-added exports.

“The needed competitiveness gains must be achieved by reducing wage and price inflation and boosting productivity growth,” the OECD said.

Monetary policy makers must also increase Turkey’s foreign exchange reserves and simplify their stance to protect against global volatility and shocks, which could stoke inflation, the OECD said.

Turkey’s annual inflation will be 7.4% in 2016 and 7.5% in 2017, the OECD said. Price increases are poised to remain well above the central bank’s 5% target, according to the organization. Inflation rose to 7.64% in June from 6.58% in May.

Turkish central bankers should simplify their monetary policy framework and tighten their stance until achieving price stability, the OECD said. Policy makers in Ankara have been easing their stance since March, reducing their overnight lending rate to 9% as of June from 10.75% in February.

“There is a risk that inflation will fall considerably less, in which case monetary policy will need to be tightened to bring inflation back towards the target and prevent further erosion of central bank credibility,” the OECD said.

The country should also reduce barriers to foreign direct investment as it remains dependent on capital inflows to finance its current-account deficit, according to the OECD.

Turkey’s annualized current-account gap shrank from $28.6 billion in April to $27.2 billion in May, its lowest since June 2010 and just below 4% of GDP. The OECD said the gap will be at 4.8% of GDP by year-end, and narrow to 4.6% in 2017.

“Domestic saving is too low and inflation has persistently exceeded the target, exacerbating the dilemma between disinflation and external price competitiveness,” the OECD said.

Source: www.wsj.com