On January 24, 2013, Robert Tchaidze, Senior Economist with the European Department of the IMF, delivered a presentation titled “Turkey: From Crisis to Recovery, 1999-2005.” The presentation covered the causes of the 2001 crisis, the anti-crisis programs undertaken by the Turkish government in cooperation with the IMF, and the country’s subsequent recovery.
Dr. Tchaidze began his talk by providing a brief economic history of Turkey from the 1970s to the 1990s. In the 1970s Turkey was a closed, state-controlled economy suffering from macroeconomic problems like inflation and unsustainable budget deficits.
Structural reforms of the 1980s removed numerous deficiencies and bottlenecks and helped improve the macroeconomic environment, but by the 1990s the reforms had stalled and a fragmented political landscape led to the re-emergence of large budget deficits.
In 1999 the IMF program was put in place. The cornerstones of the program were a large fiscal adjustment and a fixed exchange rate regime to bring down inflationary expectations and stabilize interest rates. However, the fiscal effort did not prove to be sufficient; inflation did not decline fast enough to prevent real appreciation of the lira and an overheating of the economy, while banks over-borrowed in foreign currencies in an attempt to make a profit by financing the government. Unfavorable global conditions (such as rising oil prices and the East Asian crisis) also played a role.
In late 2000-early 2001 the crisis occurred after first, insolvency rumors caused a bank run, and second, a dispute between the president and the prime minister took place. The central bank’s reserves came under pressure and the fixed exchange rate regime was abandoned, leading to a sharp depreciation of the lira, an increase in government debt, and a decline in GDP growth. In 2001, a new IMF program, based on a flexible exchange rate regime and inflation targeting, was launched. This program has proved successful in restoring growth and improving the fiscal position of the Turkish government.
ISET would like to thank Dr. Tchaidze for delivering an interesting presentation on the macroeconomic problems that Turkey faced at the end of the last century.