Twin Crises in Turkey & Criticisms of IMF Ertugrul TEKEOGLU 1st LT TuAF
Outline • IMF – Turkey Relations • Twin Crises in Turkey • Valuation of Crises of Turkey • IMF Perspective • Turkish Perspective • Criticisms of IMF
IMF – Turkey Relations • Turkey joined the IMF in 1947. IMF was on the scene on following crises; • 1947-1980 Three serious economic crises 1957-1958 1969-1970 1980 • 2000-2001 twin crises IMF was involved both economic and political history of Turkey.
Twin Crises in Turkey The disinflation and stabilization program started on January 1st 2000 collapsed in February 2001. The consequences; damaging and biggest economic crisis of Turkish economic history. Source: http://www.imf.org/external/pubs/ft/fandd/2005/06/country.htm
Inflation • High and chronic inflation has been the major problem of Turkish economy. • Turkey established 16 agreements with IMF until the year 1999 to reduce the high inflation.
A Decade Before The Crisis International Environment Politics: • Collapse of the Soviet Union and the Eastern Bloc • The Kuwait Crisis and the Gulf War Economics: • Recession in Europe • Asian Crisis in 1997 • Russian Crisis in 1998
A Decade Before The Crisis Domestic Circumstances Politics: • The Decade of Populist Coalition Governments • Integration to the EU Economics: • Recession in Europe • The Customs Union with the EU • Unstable Growth Rates
Events of year 1999 • economic crisis in Russia in (1998) • political crisis in Turkey • devastating earthquake in Marmara region recession in economy withdrawal of foreign capital from Turkey
Main Features and Aims of Program • Main Aim of the Program; “decreasing the inflation rate to a single digit by the end of 2002 associated with economic growth” • Three basis‘s of the program; • Determination of exchange rates • Fiscal discipline • Implementation of structural reforms
Main Features and Aims of Program The Measures • tax revenues • r to plausible levels, • growth potential of the economy, • provide a more effective and fair allocation of the resources in the economy
November 2000 Crisis Problems; • deterioration of the trade deficit Expansion import 35% export 7% Data source: DIE (SIS) Data source: DIE (SIS) Data source: DIE (SIS)
November 2000 Crisis Problems; • mid-size banks’ liquidity problem • increase in interest rates • delayed $780 million loan • the outflow of foreign investment • banks began to sell government securities Data source: DIE (SIS)
November 2000 Crisis Consequences; Overnight interest rate were at an average of 72.4% in November and 223.8% in December. Data source: CBRT
November 2000 Crisis Options to rescue the financial system; The Central Bank faced with a dilemma to stick by the program or to inject liquidity to the market skyrocketed (over 1000%) the overnight interest rates to four-digit levels
November 2000 Crisis On December 6th, the IMF announced that it was going to support the program by opening a new credit line with the extension of a $7.5 billion Supplementary Reserve Facility to Turkey. Government reached a new agreement with the IMF, the new Letter of Intent was announced on the 18th of December, and the CB announced its new monetary program in December 22nd.
November 2000 Crisis At the end of 2000 the markets seemed to have calmed down. By mid-January 2001 international reserves had been refilled, and interest rates had fallen below 60%.
The February 2001 Crisis On February 19th, 2001 revealed political crisis between the Prime Minister and the President seriously hit the markets. Over-night interest rate rose abruptly up to 2058% on the 20th of February, and to 4019% on the next day. Rising interest rates, with overnight rates reaching 5000%, could not stop the rapid flight from the TL. Within two days shares on the Istanbul stock exchange had fallen by 63%.
The February 2001 Crisis Foreign investors pulled $5 billion out of Turkey on 19 February alone.
The February 2001 Crisis The government could not bear the pressures of the markets any more and signed arrangement on February 22nd, again with the consent of the IMF. Within a single day the currency lost about one-third of its value against the dollar Data source: CBRT
Valuation of Crises of Turkey IMF Respective inflation rate vs devaluation rate Failure of the government to fully implement the program. privatizations banking reforms political uncertainty, external developments (increase in energy prices)
Valuation of Crises of Turkey Turkish Respective Program itself was the main reason of the crisis. It made the crises deeper and faster. Turkey’s infrastructure was not ready for transformation. Turkey didn’t experience the fiscal discipline in the past IMF made the things worse by postponing the release of the credit IMF bailed out international investors
Valuation of Crises of Turkey Turkish Respective Choosing unreachable targets Absence of substitute plan A gradual path should have been followed. Risks of exchange rate based stabilization Difficulty of abandoning it without causing a crisis fear of loosing credibility fear of capital outflow and recession
Source: www.agrnews.org/issues/116/index.html • Thousands march in Ankara, Turkey on Mar. 31, 2001 to demonstrate their opposition to IMF-ordered governmental reforms.
Other Criticisms of IMF • In actually, a cooperative institution of nations which have joined voluntarily to help each other. (Fischer 1997) • Modify individual nation’s policies to help international trade for the common good. • IMF doesn't "impose" anything but "negotiates" the conditions for receiving aid (IMF official statement)
Other Criticisms of IMF • IMF typically provides funds • only if countries agree to engage in policies • (Barro and Lee 2005) Negotiations is on one side - the IMF's - doesn’t allows sufficient time for broad consensus building (Stiglitz 2002)
Other Criticisms of IMF • ineffective in wake of recent crises in Asia. • IMF likely to cause crises rather than prevent them (Turkey) • participation in IMF programs reduces economic growth(Dreher 2006) • investors bailed out rather than people or countries (Krueger, Anne 2000 )
Other Criticisms of IMF (Quota) Calculated quotas often differ from the actual quotas Data source: Barro, Robert J., and Jong-Wha Lee. "IMF Programs: Who is Chosen and what are the Effects?" Journal of Monetary Economics 52, no. 7 (2005): 1245-1269 Data source http://www.imf.org/external/np/sec/memdir/members.htm; The quota is the basis for determining voting power major shareholders have strong influences on the IMF’s decisions
References • Aufricht, Hans (1996), International Monetary Cooperation Since Bretton Woods (Washington: International Monetary Fund; New York: Oxford University Press). • Fischer, Stanley.(1997) "Applied Economics in Action: IMF Programs." The American Economic Review 87, no. 2, Papers and Proceedings of the Hundred and Fourth Annual Meeting of the American Economic Association: 23-27. • Güloğlu Bülent, (2001) “Istikrar Programindan Istikrarsizliğa” (Kasim 2000 Ve Şubat 2001 Krizleri)” Yeni Türkiye Dergisi, Crisis Special Volume I, Eylul-Ekim 2001from http://www.econturk.org/Turkiyeekonomisi/bulent1.pdf • Stiglitz, Joseph E. (2002) - Globalization and its Discontents (New York, W,W Norton and Company, pp 12 • Stiglitz, Joseph E. April (2000), “What I Learned of the World Economic Crisis the Insider”, the New Republic. http://www.mindfully.org/WTO/Joseph-Stiglitz-IMF17apr00.htm • Krueger, Anne O.(1998) (referred to Crook, Clive) "Whither the World Bank and the IMF?" Journal of Economic Literature 36, no. 4 : pg 2000. • Barro, Robert J., and Jong-Wha Lee. (2005) "IMF Programs: Who is Chosen and what are the Effects?" Journal of Monetary Economics 52, no. 7 : 1245-1269. • Dreher, Axel. "IMF and Economic Growth (2006) The Effects of Programs, Loans, and Compliance with Conditionality." World Development 34, no. 5 (2006/5): 769-788. • IMF Official cite. http://www.imf.org/external/about.htm • CBRT Official cite. http://www.tcmb.gov.tr/yeni/eng/ • Turkish Statistics Institute http://www.die.gov.tr/ENGLISH/index.html
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