Should we expect any possible IMF intervention?

Current account deficit and net errors and omissions data released yesterday has clearly revealed that something is not right in foreign currency income and expenditure account. People are wondering about the likelihood of an IMF intervention in Turkey after the elections.

After all, it’s not possible to finance current account deficit in a stable manner with unstable items. As a matter of fact, academic doyens of economy who used to say, “There’s nothing to worry about as long as you keep financing current account deficit” are to blame for this. They didn’t listen to warnings and rational precautions suggested by people of conscience. And sadly, past governments chose to abide by the recommendations of these professors. The result: IMF intervention.

But, would an IMF intervention help solve the problems this time? Turkey’s most recent IMF experience took place in the late 1990s, which is available for further read in “Olaylarla Türkiye Ekonomisi” (Important Events in Turkish Economy) co-authored with Yalın Alpay, with footnotes and everything.

1997 year-end inflation in Turkey turned out to be %99,1. This rate was very close to the one Turkey faced during 1994 financial crisis, a %107,3 to be exact.

So, in July 1998, Turkey and IMF signed a Staff Monitoring Programme to enable closer fund supervision and control of the Turkish economy. The programme achieved partial success, bringing inflation under control to certain extent. 57thGovernment of Turkey was formed in December 1999 and the Staff Monitoring Programme was converted into a Standby Arrangement, IMF approving a three-year Stand-By credit for Turkey.

Announced on December 9th, 1999 by Turkish Central Bank and put into force on January 1st, 2000, this IMF-supported programme was essentially aiming to reduce inflation from double to single-digit in a three-year period while providing an economic growth friendly environment. The programme also included a series of reforms in public sector, which would hopefully bring some changes in public sector-private sector relations. Should the programme achieve its intended goals, then the private sector would have to make the necessary changes needed for adapting to the globalisation process and learn to accept the competition, and live with it; because, these changes were essentially aimed at eliminating the conviction that the State must protect the private sector.

The programme comprised comprehensive structural reforms in agriculture, banking, social security and similar areas as well as a new monetary and FX policy to break inflation expectations. In contradistinction to former programmes, the basis of this programme, on the other hand, was designed to monitor foreign exchange rates in a currency basket that is compatible with inflation targets and ensure that the Government would allow monetary expansion only when there are inflows into Turkey. Faster conclusion of the privatization and structural reforms process to reduce budget deficits was also stipulated in the programme with a target of 5% GDP growth.

For the three-year programme, IMF has approved a “Supplemental Reserve Facility” of 7 billion and 500 million USD, and 2 billion 900 million USD from the “stand-by” arrangement, which makes a total of $ 10,4 billion. The implementation of the programme created a certain positive atmosphere, lasting until the end of summer 2000. During this process, treasury bill interest rates fell back to the lowest rate of the last 14 years, which was 28,17%, while deposit interest fell below 30% for the first time in 21 years. Although not all targets were met in terms of privatization, 2000 yılının ilk çeyreğinde Petrol Ofisi A.Ş. and TÜPRAŞ have been privatized within the 1st quarter of 2000, along with huge cellular-license sales, consequently Government has built revenue of 2 billion and 3 million dollars.

“When the tide has turned….”

However, Turkey’s credibility took a hit when the country started to experience delays in meeting with the IMF calendar with current account deficit and public sector deficit starting to grow larger in the last quarter of 2000. A total foreign of 6 to 7 billion dollars invested in various financial instruments in Turkey have suddenly left the country. With domestic financial circles resorting to foreign currency so as to protect their own interests, Turkey would face yet another crisis especially when a strict stability programme was in place for the first time and the inflation was remaining at the lowest level for several years. Therefore, the programme which was implemented in the early 2000s failed to achieve its intended targets, pushing the Government to let Turkish lira to free-float and give up foreign exchange targets when another financial crisis was knocking on Turkey’s door in February 2001 after the big one in November.

In short, Turkish economy had to face a record-breaking negative growth and unemployment rate when Turkish lira scarcity emerged in the 4th quarter of 2000, interest rates sales and banking crisis turned into a severe foreign exchange crisis in the first quarter of 2001, thus 17th stand-by arrangement with the IMF going into waste. Delays that invoked the impression that the Turkish Government was unwilling to carry out the structural reforms, disputes among government members, the smaller-than-expected fall in inflation, artificial appreciation of Turkish lira, fast economic growth and fast expansion in imports resulting in larger current account deficit and the failure to overcome the banking sector problems are among the factors why the Government left the programme in the first place.

In an article he wrote in the late 200s, Stanley Fischer, who served as a former top official at the International Monetary Fund, indicates that many mistakes were made when drawing up terms and conditions of Stand-By arrangement signed with Turkey in 1999. For instance, he admits that “free floating policy” has done more harm than good whereas he was one of the people who stood for the free floating policy back in the day. I think I would not be wrong in saying that although the stand-by arrangement has brought short-term relief and quick credibility boost; they also caused Turkish economy to hit by another severe financial crisis towards the end of 2000.

In the light of all the facts mentioned above, I must say that I don’t get honest answers when I ask people whether they are still willing to negotiate with the IMF again. The implementation of internationally recognised standards would boost Turkey’s credibility however IMF was one of the designers of such series of measures and policies which eventually brought 2001 crisis. These parties put Turkey into a financial crisis, pushed it right into the middle of a political conflict. And then, they came to knock on our doors as if they were our saviours. I’ll leave you to decide.