Commentary on the Turkish Economy in the Aftermath of the Crisis
**
The dramatic dispute between Prime Minister Bülent Ecevit and President Ahmet Necdet Sezer in the National Security Council meeting on February 19, 2001 created panic in financial markets. The Central Bank did not provide Turkish lira liquidity to the banking system to alleviate the pressure on the lira, and pledged to continue a tight monetary policy and maintain the exchange rate peg. However, banks purchased around 7 billion dollars from the Central Bank between February 19 and February 21. Overnight repo rates reached 3000 to 5000% levels, the stock exchange collapsed and the liquidity in the government bond market dried up completely. In the end, after extensive consultation with the IMF, the government decided to abandon the exchange rate peg and let the lira float on the evening of February 21.
In the first day of the float, the lira depreciated to around 900,000 against the dollar from 680,000 and then settled at a level around 1,100,000 against the dollar by the end of February.
Immediately after the abandonment of the peg, the Central Bank governor Gazi Erçel and the Undersecretary of the Treasury Selçuk Demiralp resigned. Erçel was replaced by Süreyya Serdengeçti, the former deputy governor of the Central Bank, and Demiralp was replaced by Faik Öztrak, the Vice President of the Banking Regulatory Authority.
The government appointed Kemal Derviş, a long time World Bank executive, to the cabinet as State Minister in charge of economic affairs. Derviş was given a strong and broad mandate to lead the stabilisation efforts and to coordinate the efforts of all relevant government agencies.
Upon taking over his post, Mr. Derviş quickly announced a three-stage program to be implemented to resolve economic crisis. At the first stage, emergency steps would be taken to resolve the problems of the banking sector and the resulting uncertainty in financial markets. In the second stage, measures would be taken to stabilize the exchange rate and interest rates. Finally, with the improvement of macroeconomic balances, a suitable environment would be created for rapid economic growth in the third stage.
Shortly after the appointment of Mr. Derviş, Zekeriya Temizel, the Head of the Banking Regulatory Authority also resigned. Temizel was replaced by Engin Akçakoca, the chief executive of the banks taken over by the Deposit Insurance Fund.
At the end of February, banking licenses of four banks previously taken over by the Deposit Insurance Bank (Egebank, Yurtbank, Yaşarbank and Bank Kapital) were revoked and all their assets, liabilities and personnel were transferred to Sümerbank. On March 15, İktisat Bank was taken over by the Deposit Insurance Fund.
In late March, a single independent Board was appointed to manage the three main state owned banks. The accumulated losses on the banks’ balance sheets were publicly announced. The Treasury was instructed to issue securities to the state banks to recapitalize them and the Central Bank started to provide liquidity to the state banks through purchases and repos of the Treasury securities held by them.
The delay in the implementation of more concrete policy measures and the symptoms of disagreement and tension within the government caused a second wave of depreciation, pushing the lira to over 1,300,000 against the dollar in early April.
On April 14, State Minister Derviş announced more detailed measures, focusing heavily on public finance. The target for the primary budget surplus was revised to 5.5% of GNP, representing a very substantial fiscal adjustment under quite unfavourable economic conditions. It was also indicated that the fiscal adjustment would come not only from the consolidated budget of the central government, but also from other components of the public sector including the state owned banks, state economic enterprises and local governments.
15 legislative measures aimed at supporting the economic programme were announced:
- Amendments to the 2001 Budget Law: To reflect the effects of the devaluation and higher inflation and to enable the government to incur the costs of the banking sector restructuring (Done)
- Annulment of all legislation and decrees leading to duty losses for state banks: To prevent future creation of duty losses (Done)
- Amendments to the Public Borrowing Law: To achieve greater efficiency and transparency (Done)
- Amendments to the Expropriation Law: To prevent abuses of the expropriation concept leading to fiscal losses (Done)
- Liquidation of budgetary and extra-budgetary funds: To achieve greater efficiency and transparency (Draft Prepared)
- Amendments to the Public Procurement Law: To prevent corruption and reduce fiscal costs
(Draft Prepared)
- A new Central Bank Law: To ensure the independence of the Central Bank and to provide the bank with the tools to operate in the floating exchange rate regime (Done)
- A new Banking Act: Comprehensive restructuring of the banking framework (Done)
- A new Employment Security Law: Making it harder for employers to terminate employees (Draft Prepared)
- Strengthening of the Economic and Social Council: To ensure that adequate consultation takes place prior to government decisions (Done)
- Amendments to the Civil Aviation Law: Allowing Turksh Airlines to set prices freely without the intervention of the Minister of Transportation (Done)
- Telecommunications Law: Comprehensive restructuring of the telecommunications framework and the establishment of an independent regulatory authority (Done)
- Sugar Law: Liberalizing the sugar market and ending state subsidies (Done)
- Tobacco Law: Liberalizing the tobacco market and ending state subsidies (Draft Prepared)
- Natural Gas Law: Liberalizing the natural market, improving efficiency and transparency and establishing an independent regulatory authority (Done)
During late April and early May, progress was made on the structural reform front and the discussions between the government and IMF continued. It gradually became clear that an IMF-lead support package of over $12 billion would be made available. As expectations of an international aid package rose, markets returned to relative calm. The risk premium on 3 to 9 month interest rates fell significantly and the lira strengthened slightly to levels around 1,150,000 to the dollar.
On May 16, 2001 the IMF formally approved a $15 billion support package to Turkey. On the same day, an extensive announcement was made by Derviş and Serdengeçti, outlining monetary policy guidelines. The $3.9 billion first installment of the IMF support is due to be released on May 18.
The complete text of the letter of intent can be found on the IMF web site at http://www.imf.org/external/NP/LOI/2001/tur/02/INDEX.HTM
To put all these developments into perspective, one has to remember that the economic reform effort in Turkey is not new. In fact, the basic principle of the all the government initiatives and the agreements with the IMF since 1998 can be summarized as follows:
- A large and sustained improvement in the primary budget, to narrow the large public sector deficits that lie at the heart of the inflation process
- The adjustment of public sector wages and agricultural support prices in line with targeted inflation to minimize inflationary inertia
- Structural reforms to ensure a lasting strengthening of public finances
- Stepped up privatization to enhance economic efficient and lower the domestic borrowing requirement
- Measures to strengthen the banking system
- Limits on the expansion of the Central Bank’s net domestic assets to ensure the consistency of overall policies
Despite the different methodology and speed, the 1998 anti-inflationary measures, the 1999-2000 exchange rate peg, the late 2000 adjustments and the spring 2001 reforms were designed towards the same long term objectives.
There were five key lessons drawn from the Turkish experience during the 2000 anti-inflation programme and the two crises that took place.
- A weak banking system can destroy even a well-designed programme, so banking system problems should be dealt with in a timely fashion
- Delayed fiscal adjustment leads to a need for an extremely speedy fiscal adjustment in the end, upsetting macroeconomic balances
- Transparency is perhaps the single most important criterion in establishing credibility and hence enhancing the chances of success
- Consensus building and extensive consultation are crucial
- Pegged exchange rate regimes are extremely difficult to maintain over long periods
**
The dramatic dispute between Prime Minister Bülent Ecevit and President Ahmet Necdet Sezer in the National Security Council meeting on February 19, 2001 created panic in financial markets. The Central Bank did not provide Turkish lira liquidity to the banking system to alleviate the pressure on the lira, and pledged to continue a tight monetary policy and maintain the exchange rate peg. However, banks purchased around 7 billion dollars from the Central Bank between February 19 and February 21. Overnight repo rates reached 3000 to 5000% levels, the stock exchange collapsed and the liquidity in the government bond market dried up completely. In the end, after extensive consultation with the IMF, the government decided to abandon the exchange rate peg and let the lira float on the evening of February 21.
In the first day of the float, the lira depreciated to around 900,000 against the dollar from 680,000 and then settled at a level around 1,100,000 against the dollar by the end of February.
Immediately after the abandonment of the peg, the Central Bank governor Gazi Erçel and the Undersecretary of the Treasury Selçuk Demiralp resigned. Erçel was replaced by Süreyya Serdengeçti, the former deputy governor of the Central Bank, and Demiralp was replaced by Faik Öztrak, the Vice President of the Banking Regulatory Authority.
The government appointed Kemal Derviş, a long time World Bank executive, to the cabinet as State Minister in charge of economic affairs. Derviş was given a strong and broad mandate to lead the stabilisation efforts and to coordinate the efforts of all relevant government agencies.
Upon taking over his post, Mr. Derviş quickly announced a three-stage program to be implemented to resolve economic crisis. At the first stage, emergency steps would be taken to resolve the problems of the banking sector and the resulting uncertainty in financial markets. In the second stage, measures would be taken to stabilize the exchange rate and interest rates. Finally, with the improvement of macroeconomic balances, a suitable environment would be created for rapid economic growth in the third stage.
Shortly after the appointment of Mr. Derviş, Zekeriya Temizel, the Head of the Banking Regulatory Authority also resigned. Temizel was replaced by Engin Akçakoca, the chief executive of the banks taken over by the Deposit Insurance Fund.
At the end of February, banking licenses of four banks previously taken over by the Deposit Insurance Bank (Egebank, Yurtbank, Yaşarbank and Bank Kapital) were revoked and all their assets, liabilities and personnel were transferred to Sümerbank. On March 15, İktisat Bank was taken over by the Deposit Insurance Fund.
In late March, a single independent Board was appointed to manage the three main state owned banks. The accumulated losses on the banks’ balance sheets were publicly announced. The Treasury was instructed to issue securities to the state banks to recapitalize them and the Central Bank started to provide liquidity to the state banks through purchases and repos of the Treasury securities held by them.
The delay in the implementation of more concrete policy measures and the symptoms of disagreement and tension within the government caused a second wave of depreciation, pushing the lira to over 1,300,000 against the dollar in early April.
On April 14, State Minister Derviş announced more detailed measures, focusing heavily on public finance. The target for the primary budget surplus was revised to 5.5% of GNP, representing a very substantial fiscal adjustment under quite unfavourable economic conditions. It was also indicated that the fiscal adjustment would come not only from the consolidated budget of the central government, but also from other components of the public sector including the state owned banks, state economic enterprises and local governments.
15 legislative measures aimed at supporting the economic programme were announced:
- Amendments to the 2001 Budget Law: To reflect the effects of the devaluation and higher inflation and to enable the government to incur the costs of the banking sector restructuring (Done)
- Annulment of all legislation and decrees leading to duty losses for state banks: To prevent future creation of duty losses (Done)
- Amendments to the Public Borrowing Law: To achieve greater efficiency and transparency (Done)
- Amendments to the Expropriation Law: To prevent abuses of the expropriation concept leading to fiscal losses (Done)
- Liquidation of budgetary and extra-budgetary funds: To achieve greater efficiency and transparency (Draft Prepared)
- Amendments to the Public Procurement Law: To prevent corruption and reduce fiscal costs
(Draft Prepared)
- A new Central Bank Law: To ensure the independence of the Central Bank and to provide the bank with the tools to operate in the floating exchange rate regime (Done)
- A new Banking Act: Comprehensive restructuring of the banking framework (Done)
- A new Employment Security Law: Making it harder for employers to terminate employees (Draft Prepared)
- Strengthening of the Economic and Social Council: To ensure that adequate consultation takes place prior to government decisions (Done)
- Amendments to the Civil Aviation Law: Allowing Turksh Airlines to set prices freely without the intervention of the Minister of Transportation (Done)
- Telecommunications Law: Comprehensive restructuring of the telecommunications framework and the establishment of an independent regulatory authority (Done)
- Sugar Law: Liberalizing the sugar market and ending state subsidies (Done)
- Tobacco Law: Liberalizing the tobacco market and ending state subsidies (Draft Prepared)
- Natural Gas Law: Liberalizing the natural market, improving efficiency and transparency and establishing an independent regulatory authority (Done)
During late April and early May, progress was made on the structural reform front and the discussions between the government and IMF continued. It gradually became clear that an IMF-lead support package of over $12 billion would be made available. As expectations of an international aid package rose, markets returned to relative calm. The risk premium on 3 to 9 month interest rates fell significantly and the lira strengthened slightly to levels around 1,150,000 to the dollar.
On May 16, 2001 the IMF formally approved a $15 billion support package to Turkey. On the same day, an extensive announcement was made by Derviş and Serdengeçti, outlining monetary policy guidelines. The $3.9 billion first installment of the IMF support is due to be released on May 18.
The complete text of the letter of intent can be found on the IMF web site at http://www.imf.org/external/NP/LOI/2001/tur/02/INDEX.HTM
To put all these developments into perspective, one has to remember that the economic reform effort in Turkey is not new. In fact, the basic principle of the all the government initiatives and the agreements with the IMF since 1998 can be summarized as follows:
- A large and sustained improvement in the primary budget, to narrow the large public sector deficits that lie at the heart of the inflation process
- The adjustment of public sector wages and agricultural support prices in line with targeted inflation to minimize inflationary inertia
- Structural reforms to ensure a lasting strengthening of public finances
- Stepped up privatization to enhance economic efficient and lower the domestic borrowing requirement
- Measures to strengthen the banking system
- Limits on the expansion of the Central Bank’s net domestic assets to ensure the consistency of overall policies
Despite the different methodology and speed, the 1998 anti-inflationary measures, the 1999-2000 exchange rate peg, the late 2000 adjustments and the spring 2001 reforms were designed towards the same long term objectives.
There were five key lessons drawn from the Turkish experience during the 2000 anti-inflation programme and the two crises that took place.
- A weak banking system can destroy even a well-designed programme, so banking system problems should be dealt with in a timely fashion
- Delayed fiscal adjustment leads to a need for an extremely speedy fiscal adjustment in the end, upsetting macroeconomic balances
- Transparency is perhaps the single most important criterion in establishing credibility and hence enhancing the chances of success
- Consensus building and extensive consultation are crucial
- Pegged exchange rate regimes are extremely difficult to maintain over long periods
posted by Ümit Kumcuoğlu at 1:51 AM
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