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
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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
1957-1958
1969-1970
1980
2000-2001 twin crises
IMF was involved both economic and political history of
Turkey.
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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.
Source: http://www.imf.org/external/pubs/ft/fandd/2005/06/country.htm
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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.
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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
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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
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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
8/27
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
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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
10/27
November 2000 Crisis
60000
50000
Problems;
40000
30000
20000
deterioration of
the trade deficit
Expansion
import 35%
export 7%

10000
0
1993
1994
1995
Data source: DIE (SIS)
1996
1997
Total import
1998
1999
2000
2001
Total export
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1993
1994
1995
1996
1997
1998
1999
2000
2001
export/import
Data
Data source:
source: DIE
DIE (SIS)
(SIS)
11/27
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



0
1993
1994
1995
1996
1997
1998
1999
2000
2001
-5000
-10000
-15000
-20000
-25000
-30000
Data source: DIE (SIS)
Foreign trade balance
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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.
250
200
150
100
50
0
1993
1994
Data source: CBRT
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
interbank overnight rate
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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
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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.
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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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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%.
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The February 2001 Crisis
Foreign investors pulled $5 billion out of Turkey
on 19 February alone.
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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 onethird of its value against the dollar
100
90
80
70
60
50
40
30
20
10
0
2000
2001
Data source: CBRT
2002
2003
public dept/GNP%
2004
2005
19/27
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)
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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
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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
22/27
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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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)
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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)
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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 )
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Other Criticisms of IMF (Quota)
%IMF QUOTA DISTRIBUTION
17.5
Calculated quotas often differ from the actual quotas
18
16
PERCENTAGE
14
12
10
6.3
8
6.1
6
5.1
5.1
3.3
4
3.0
2.8
Loan
amount ($
billion)
Year
Country
%of Quota
1994
Mexico
17.8
688
1997
South Korea
21
1757
1999
Turkey
15
1560
2
0
USA
Japan
Germany
France
UK
Saudi
Arabia
China
Russia
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
SHAREHOLDERS
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
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References
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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-StiglitzIMF17apr00.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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