Twin Crises in Turkey & Criticisms of IMF

Ertugrul TEKEOGLU1st LT TuAF

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Outline IMF – Turkey Relations Twin Crises in Turkey Valuation of Crises of Turkey

IMF Perspective Turkish Perspective

Criticisms of IMF

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IMF – Turkey Relations Turkey joined the IMF in 1947. IMF was on the scene on following crises;

1947-1980 Three serious economic crises

1957-19581969-19701980

2000-2001 twin crises

IMF was involved both economic and political history of Turkey.

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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.

Twin Crises in Turkey

Source: http://www.imf.org/external/pubs/ft/fandd/2005/06/country.htm

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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.

Inflation

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International EnvironmentPolitics:

Collapse of the Soviet Union and the Eastern Bloc

The Kuwait Crisis and the Gulf WarEconomics:

Recession in Europe Asian Crisis in 1997 Russian Crisis in 1998

A Decade Before The Crisis

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Domestic CircumstancesPolitics:

The Decade of Populist Coalition Governments

Integration to the EUEconomics:

Recession in Europe The Customs Union with the EU Unstable Growth Rates

A Decade Before The Crisis

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economic crisis in Russia in (1998) political crisis in Turkey devastating earthquake in Marmara region

recession in economy

withdrawal of foreigncapital from Turkey

Events of year 1999

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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

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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

Main Features and Aims of Program

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Problems;

deterioration of the trade deficit

Expansionimport 35%export 7%

November 2000 Crisis

0

10000

20000

30000

40000

50000

60000

1993 1994 1995 1996 1997 1998 1999 2000 2001

Total import Total export

Data source: DIE (SIS)

Data source: DIE (SIS)

0.010.020.030.040.050.060.070.080.090.0

1993 1994 1995 1996 1997 1998 1999 2000 2001

export/import

Data source: DIE (SIS)

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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

-30000

-25000

-20000

-15000

-10000

-5000

01993 1994 1995 1996 1997 1998 1999 2000 2001

Foreign trade balance

November 2000 Crisis

Data source: DIE (SIS)

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Consequences;Overnight interest rate were at an

average of 72.4% in November and 223.8% in December.

November 2000 Crisis

0

50

100

150

200

250

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

interbank overnight rateData source: CBRT

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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

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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

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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%.

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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

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Foreign investors pulled $5 billion out of Turkey on 19 February alone.

The February 2001 Crisis

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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

The February 2001 Crisis

0102030405060708090

100

2000 2001 2002 2003 2004 2005

public dept/GNP%Data source: CBRT

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IMF Respectiveinflation rate vs devaluation rate

Failure of the government to fully implement the program.privatizations

banking reformspolitical uncertainty,external developments (increase in energy prices)

Valuation of Crises of Turkey

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Turkish RespectiveProgram 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 creditIMF bailed out international investors

Valuation of Crises of Turkey

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Turkish RespectiveChoosing unreachable targets Absence of substitute planA 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

Valuation of Crises of Turkey

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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.

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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

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Negotiations is on one side - the IMF's - doesn’t allows sufficient time for broad consensus building (Stiglitz 2002)

IMF typically provides fundsonly if countries agree to engage in policies

(Barro and Lee 2005)

Other Criticisms of IMF

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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

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6.3 6.15.1 5.1

3.3 3.0 2.8

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CEN

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USA Japan Germany France UK SaudiArabia

China Russia

SHAREHOLDERS

%IMF QUOTA DISTRIBUTION

Other Criticisms of IMF (Quota)

major shareholders have strong influences on the IMF’s decisions

The quota is the basis for determining voting power

Data source http://www.imf.org/external/np/sec/memdir/members.htm;

Year Country

Loan amount ($ billion) %of Quota

1994 Mexico 17.8 688

1997 South Korea 21 1757

1999 Turkey 15 1560

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

Calculated quotas often differ from the actual quotas

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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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