1. Twin Crises in Turkey & Criticisms of IMF
Ertugrul TEKEOGLU
1st LT TuAF

2. Outline IMF – Turkey Relations Twin Crises in Turkey
Valuation of Crises of Turkey
IMF Perspective
Turkish Perspective
Criticisms of IMF

3. IMF was involved both economic and political history of Turkey.
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IMF – Turkey Relations
Turkey joined the IMF in 1947.
IMF was on the scene on following crises;
Three serious economic crises
1980
twin crises
IMF was involved both economic and political history of Turkey.
crises are followed by military interventions
Turkey has always been one of the first five lending countries of the IMF

4. damaging and biggest economic crisis of Turkish economic history.
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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.
The disinflation and stabilization program that prepared and carried out under IMF supervision which started in Turkey on January 1st 2000 collapsed in February The program was launched to reduce high inflation rate that Turkey has been in trouble with for long time. The consequences of the collapse were damaging for the Turkish economy. It was the biggest economic crisis of Turkish economic history.
Because of the Turkey’s limited international economic capacity, the economic crisis of Turkey didn’t attract much attention in international area.
Source:

5. 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.

6. 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

7. A Decade Before The Crisis
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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
Coalition Governments were incapable of making hard economic decisions and sticking to them
Economical situation is affected by recession in Europe, the custom union with the EU, and unstable growth rates.

8. Events of year 1999 economic crisis in Russia in (1998)
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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
The year of 1999 was a dramatic year for the Turkish economy. Economic crisis in Russia in 1998 and political crisis in Turkey led the economy started with the recession which caused withdrawal of foreign capital from Turkey
In August 17, 1999 devastating earthquake in which thousands of people killed hit Turkey in its most industrial and well-off the Marmara region
the cost of the earthquake was estimated at $6.2 billion. GDP fell by 5% in 1999.

9. Main Features and Aims of Program
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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
1999 arrangement is the 17th arrangement that made with IMF
Determination of exchange rates under a pre-announced arrangement
Fiscal discipline both of the central government budget and the rest of public sector
Implementation of structural reforms, especially an acceleration in privatization

10. Main Features and Aims of Program
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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
R real interest rate

11. November 2000 Crisis Problems; deterioration of the trade deficit
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November 2000 Crisis
Problems;
deterioration of the trade deficit
Expansion
import 35%
export 7%
Data source: DIE (SIS)
Deterioration of trade deficit;
Expansion in import had reached to 35% in 2000 while export growth remained at 7 %.
Current account deficit/GDP ratio reached nearly to 4.9% level at the end of the 2000 whereas it had been 0.7% at the end of the 1999.
Appreciation of the currency reduced the competitiveness of domestic goods in international markets and increased the trade deficit
Thanks to low interest rate investment, consumption and therefore imports increased. And because of the over valued currency exports decreased.
The rise of the US dollar against the Euro also had resulted in a deterioration of the current account deficit.
Data source: DIE (SIS)
Data source: DIE (SIS)

12. November 2000 Crisis Problems; mid-size banks’ liquidity problem
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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
Crisis began to manifest itself as a liquidity problem of some mid-size banks.
banks tried to close their open foreign exchange positions due to regulatory and balance sheet purposes. This move caused interest rates to increase.
World Bank delayed the approval of a $780 million loan
Banking-sector vulnerabilities prevented the authorities from adjusting the exchange rate when it came under pressure.
The outflow was followed by the rise in the interest rates at the last week of November and the market risk in Turkey increased.
The banks in need of short-term funding began to sell government securities.
Rush to liquidity was inflamed because of the competitive maneuvering among some private banks.
The decline in the value of government securities and the rise in the sovereign risk because of the fragility of the financial system led foreign investors to accelerate their exit from the Turkish markets by selling their securities.
Data source: DIE (SIS)

13. November 2000 Crisis Consequences;
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November 2000 Crisis
Consequences;
Overnight interest rate were at an average of 72.4% in November and 223.8% in December.
Data source: CBRT

14. November 2000 Crisis Options to rescue the financial system;
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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
“The Central Bank faced with a dilemma; either to stick by the program and monetary rule “at the expense of a deep financial crisis”,
or to inject liquidity to the market exceeding its defined target for net domestic assets in order to rescue the financial system.
After some hesitation it started providing extra liquidity to the troubled banks

15. 4/20/2017
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.
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.
This enabled Turkey to draw about $577 million immediately. It also decided to provide additional resources under the SRF worth about$7.5 billion, to alleviate balance of payments difficulties stemming from the recent financial crisis
Why IMF continue to support Turkey even there was a great opportunity that IMF would loss credibility.
WHY Fischer says, Turkey is not an ordinary country, its strategic importance.

16. 4/20/2017
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%.
At the end of 2000 the markets seemed to have calmed down and the erosion of international reserves stopped.
By mid-January international reserves had been refilled, and interest rates had fallen below 60%.

17. 4/20/2017
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%.

18. 4/20/2017
The February 2001 Crisis
Foreign investors pulled $5 billion out of Turkey on 19 February alone.

19. 4/20/2017
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

20. Valuation of Crises of Turkey
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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)
Inflation rate was converging to the devaluation rate very slowly and at the end of the year target was overshot
The government failed to sell a block of share in Turk Telecom and this accounted for half of the $4 billion shortfall in privatization receipts
Political uncertainty causes loss of confidence.

21. Valuation of Crises of Turkey
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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
Misguided economic policies that had been followed since 1980 under pressure from the IMF
Bailed out: Turkish government announced a full guarantee for foreign creditors of all domestic banks with IMF pressure.

22. Valuation of Crises of Turkey
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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
Unreachable target diminished economic agents’ confidence
The problem of the Turkish economy was high and chronic inflation rather than hyperinflation.

23. 4/20/2017
The crises caused very big chaos whose burden is carried by the Turkish Nation.
Source:
Thousands march in Ankara, Turkey on Mar. 31, 2001 to demonstrate their opposition to IMF-ordered governmental reforms.

24. Other Criticisms of IMF
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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)
Policies like cutting public spending, cutting deficits, raising taxes, or interest rates that lead to a contraction of the economy (Stiglitz’s criticism )
According to Barro and Lee, a total of 725 programs were approved by Fund over the last three decades. Of these 725 programs, 594 of them were short term and mid term Stand-By Arrangements and Extended Fund Facility programs

25. Other Criticisms of IMF
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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)
Problems not fault of IMF
IMF’s dedication to structure reform is nothing new
IMF lends as last resort in most cases
Asia crises owed nothing to IMF policies or actions.
Stiglitz was arguing the red writing.

26. Other Criticisms of IMF
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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 )
Once Cold War ended, Russia experienced major difficulties.
Looked to IMF for strategy.
6 years after IMF got involved, Russia has improved in many areas.

27. Other Criticisms of IMF (Quota)
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Other Criticisms of IMF (Quota)
Calculated quotas often differ from the actual quotas
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):
Each member is assigned ‘quotas’ based on its standing in the world economy
The first tranche, 25% of the quota, is available automatically
beyond the first tranche almost always requires an arrangement between the IMF and the member country
Important decisions require special voting majorities of 85 percent. Hence, the United
States alone and a group of three Western European countries have veto power
This also means that a country which has a close ties with the main shareholders of the IMF can receive IMF support.
Data source
The quota is the basis for determining voting power
major shareholders have strong influences on the IMF’s decisions

28. 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:
Güloğlu Bülent, (2001) “Istikrar Programindan Istikrarsizliğa” (Kasim 2000 Ve Şubat 2001 Krizleri)” Yeni Türkiye Dergisi, Crisis Special Volume I, Eylul-Ekim 2001from
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.
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 :
Dreher, Axel. "IMF and Economic Growth (2006) The Effects of Programs, Loans, and Compliance with Conditionality." World Development 34, no. 5 (2006/5):
IMF Official cite.
CBRT Official cite.
Turkish Statistics Institute

29. ? / +
Thank You