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ECONOMICS - BUS 501 IMF and Turkish Economic Programs SEDA ŻSTANBULLUOŠLU PELŻN KIRIŽOŠLU I. INTRODUCTION One of the biggest crisis of Turkish economic history preceded by a financial turmoil that burst in the second half of November 2000 just at the midst of an exchange rate based stabilization program. The pressure in the market calmed down soon after a new letter of intent was presented to International Monetary Fund (IMF). However, as of the end of December, the average interest rates, both the overnight rate and secondary market bond rate, were almost four times higher than their levels at the beginning of November and more than five times higher than the pre-announced year-end depreciation rate of the lira. This unsustainable situation ended on the February 19, 2001, when the prime minister announced that there was a severe political crisis that ignited a crisis in the highly alerted markets due to what had happened at the end of the preceding year. On that day the overnight rates jumped to unprecedented levels of 6200 percent in uncompounded terms. Three days later, the exchange rate system collapsed and Turkey declared that it was going to implement a floating exchange rate system from that time onwards. In this paper I will try to analyze monetary policy goals, targets, instruments and the assumptions related to the 2000 and 2001 economic programs. First, I will be explaining the macroeconomic developments & their consequences for 2000, and then move on 2001s revised macroeconomic developments and their consequences. II. The Main Elements of the 2000 IMF Disinflation Program The 2000-disinflation program, as documented in the December 1999 Letter of Intend, covered a time horizon of three years until the end of 2002. During the course of this period, specific targets were set on the monetary aggregates, daily depreciation of the exchange rate, and on fiscal balances. All of these targets were pre-announced on a given calendar, and were recognized as the performance criteria to be monitored by the IMF staff during their successive visits throughout the implementation of the program. The program is observed to be based upon three main components: (i) austerity of public expenditures subject to specific targets for non-interest fiscal surpluses; (ii) a pre-announced calendar for the rate of currency depreciation in line with the targeted rate of inflation; and (iii) a monetary rule which set the liquidity generation mechanism to the net foreign asset position of the Central Bank, thereby forcing the CB to act as a semi-currency board. The program aimed at reducing the inflation rate at discrete adjustments until the end of 2002. Accordingly, the wholesale price index (WPI), which hovered around 80 percent during the last decade, would be reduced to 20 percent by the end 2000. (consumer prices, CPI, would be reduced to 25 percent). The targeted rates of the increase in WPI and CPI were set, respectively, to 10 and 12 percent by 2001, and to 5-7 percent by 2002. The program further aimed at increasing the public sector (non-interest) primary balance to +3.7 percent of the GNP by the end of 2000, from a deficit of 2.8 percent in 1999. This target was set net of the earthquake (of August 1999) related public expenditures, which were estimated to reach 1.5 percent of the GNP in 2000. In order to reach this target, expected revenue sources originated from revisions on income taxes (0.3 percent), and increased rates on indirect taxes (0.5 percent) and value added taxes (0.4 percent). Yet the major revenue source for the Treasury was planned to come from privatization operations (Turkish Telecomm and Turkish Airlines being the two major items) which was expected to bring an added income of at least 3.5 percent of the GNP (around 7.5 billions US$). The program adopted the monetary approach to balance of payments in its theoretical foundations on the determination of the liquidity generation mechanism and the resolution of the balance of payments equilibrium.4 This approach, which provides the underlying frame of reference to almost all IMF-style austerity programs, expects the real exchange rate to be in long run equilibrium at its purchasing power parity level, and maintains that the domestic supply of money be endogenized in a regime of open capital account. In what follows, the program announced that the rate of currency depreciation would be set according to a pre-announced calendar, thereby setting the course for the evolution of the exchange rate throughout the year. For this purpose, the CB declared an exchange rate basket consisting of 1US$ + 0.77 Euro, and announced a daily calendar of depreciation rate which adds up to a cumulative 20 percent by the end of 2000. The pre-announcement of the exchange rate depreciation according to such a tablita was regarded as the backbone of the program in its attempt to break the inflationary inertia of three decades. Containment of inflationary expectations by using the exchange rate as a nominal anchor has been a common element in most of the recent stabilization attempts in Latin America and Israel. One of the well-known lessons from such exchange rate based-disinflation and stabilization attempts concerns their detrimental consequences on the external balances. 5 The unavoidable appreciation of the domestic currencies during the course of the program, together with the elimination of exchange rate risk, give clear signals for increased foreign borrowing. The rapid escalation of the stock of foreign debt mostly originate from increased short term borrowing which, under most circumstances, is observed to be exercised at a rate exceeding the social optimum (Rodrik and Velasco, 2000). Given the historical observations that the prolonged use of the exchange rate-based stabilization programs are associated with increased external fragility and unsustainable foreign indebtedness, the Turkish disinflation program provided a strategy of exit to be embarked through the second half of its implementation. Accordingly, starting after the first 18 months in July 2001, the exchange rate basket (of 1 US$ + 0.77 Euro) would have been allowed to float within a crawling band. The tails of the band would be widened every six months by 15 percent apart from end-to-end. Finally, by the end of 2002 the tablita and the limits on the band would be completely dismantled, and Turkey would switch to a regime of fully flexible foreign exchange markets.
Approximate Word count = 4094
Approximate Pages = 16.4
(250 words per page double spaced)
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