I keep saying on every occasion possible that we need external financing. I have supporters and naysayers as well. Going to extreme lengths, some even turn in to a matter of survival for Turkey.
So, in order to avoid a one-sided perspective on this foreign financing matter, yesterday I re-reviewed “Milestones in Turkish Economy” co-authored with Yalın Alpay page by page. What I was trying to find out was:
“Why are conservatives governments not so fond of borrowing money from international institutions or foreign states, and instead they prefer to spend markets’ or people’s money?”
In 1958, an unpleasant experience, which could be considered as a basis for this policy, took place in Turkey during Adnan Menderes’ term. Apparently, this incident caused the following conservative or centre-right leaders to take a rather cautious approach to external borrowing.
Although the Democratic Party leaders had aimed at ensuring that foreign capital could directly contribute to exports and GDP growth through its free market and international expansion policy during the 1950s, apparently, they failed to achieve their intended purpose. Total amount of foreign direct capital that flowed into Turkish market from 1950 to 1959 was around 77 million USD and these capital inflows were mostly in the form of machinery, equipment or a licence. This amount was not even equal to 5% of total financial aid and loan Turkey had received from foreign countries during the same period.
To overcome the financial crisis, the Government started to take some measures as of 1956. Apart from the volume restrictions imposed on importing activity, in 1956, the Turkish National Security Law of 1940 re-entered into force to bring domestic and foreign market prices under control. When someone suggested, “What would happen if we don’t pay our foreign debt?” people in their right minds reminded them of the fact that Turkey had just paid off the final instalment of Ottoman debt in 1954. So, leaders started to make efforts to keep Turkey’s reputation as an honest debtor intact.
Finally, as a result of negotiations conducted before the OECD under coordination of the IMF, in 1958, Turkey agreed to pay its consolidated debt in instalments.
“First severe devaluation…”
In the meantime, problems caused by import restrictions which have been imposed to help reduce the current account deficit led to further problems. Reaching a peak amount of 556 million USD in 1952, imports volume declined to 407 million USD in 1956, and then to 315 million USD in 1958. As volume restrictions, foreign-exchange rationing and other import bans were used as the main means to limit imports; Turkey had to suffer an economic contraction which was very similar to the limited import regime following the Great Depression of 1929. Prices went up swiftly while black market prices dominated everywhere. I used some examples from this era in Turkish economic history to describe what a black market is in my introduction to economics class yesterday.
In short, from 1959 to 1958, Turkey stopped its international expansion. The fact that the expert, who was appointed by the World Bank to monitor Turkish economy, was dismissed by the Turkish government because he was interfering in Turkey’s economic affairs too much led the World Bank to deny Turkey’s loan application for new projects. External debt-servicing exceeding 30% of total exports along with capital flights caused by an anticipated devaluation of the home currency resulted in US Dollar rapidly rise to TRY 20 from TRY 2.8 in black market.
In August 1958, out of desperation, Turkey’s Democratic Party agreed to implement a stability programme coordinated by the IMF. Having its repayment (a total debt of 422 million USD) postponed to a later date, Turkey signed a repayment deal with 3% interest rate. Also, having granted a fresh loan of 359 million USD, Turkey received 259 million from the United States, 75 million from the OECD (formerly known as OEEC) and 25 million from the IMF.
Also, according to the programme, dollar’s official exchange rate to Turkish lira has been increased from 2.80 to 9 TRY by decisions issued on August 4. It’s one of the most interesting periods in Turkey’s economic history where Turkey had to suffer from a vicious cycle of devaluation-inflation. Turkey’s foreign trade volume grew immediately following the devaluation, its trade deficit consequently running larger.
Considering the 1980 Turkish coup d’état which took place only two years after this period, and the fact that IMF’s remedies are no good for improving countries’ economies since they cause further harm, I think we can appreciate why the current government has hesitations about getting foreign loans, with strings attached. This, however, doesn’t change the fact that Turkey needs external financing. So, we have to find it one way or the other.