Seemhn 15 Turska

8/11/2019 Seemhn 15 Turska

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The Economic and Financial Stability in Turkey:

A Historical Perspective

Yksel Grmez, Central Bank of Turkey

Serkan Yiit, Central Bank of Turkey

Abstract: Since gaining independence in 1923 until the 2000s when the Republic of Turkey applied

for membership in the European nion! "olatile trends were recorded in the country in terms of both

economic growth and financial performance# $n the early stages! lack of human capital and hardcurrency reser"es pre"ented rapid economic growth and creation of welfare# The priority was gi"en to

institutional reforms in order to achie"e sustainable growth under low inflation and financial stability#

%eightened political unrest in Europe leading to &&$$ forced the 'oung Republic to rely on a

(mi)ed* system of etatism for sustainable growth and financial stability# +ri"ate ownership and greater

participation of pri"ate capital in economic acti"ity were gi"en additional incenti"es during the 19,0s!

whereas an import-substitution growth strategy was initiated .uite successfully during the 19/0s when

the Turkish economy e)perienced the best growth performance during 0 years of its e)istence# The oil

crisis of the 190s took away all the resources and pre"ented the emergence of strong pri"ate banks#

The accumulated capital was wiped out by the balance of payment crises# The second half of the 190s

was the period when pri"ate banks began winning a market share# The 1990s! which may best be

described as the (lost decade* in terms of banking and financial stability! ended with a huge financial

crisis in 2001# fter 2002! Turkish economy managed to achie"e a "ery high le"el of growth that came

with low and decreasing rate of inflation# The Republic of Turkey is now facing the challenging task of

increasing domestic sa"ings to support sustainable growth under low and stable inflation and managing

its way through the complications of global financial crises that still clouds the air and threatens the

economic and financial stability all around the world#

Keywords 4anking! financial stability! economic growth#

JE !ode: 51! 521! 67

Acknowledgments cknowledgments are due to all South-East Europe 8onetary %istory etworkmembers for encouraging us to prepare this paper#


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The Economic and Financial Stability in Turkey: A Historical Perspective

1Fourth Conference of Southeast Europe onetary History !et"ork #SEEH!$

"# $ntroduction

Economic and financial stability has always attracted strong interest from academicians and

practitioners# Economic stability may best be defined as an economic en"ironment without e)cessi"e

fluctuations or e)treme "olatility in the macro-economic "ariables# &hen the economy grows at a fair

rate under low and stable inflation! it is considered to be economically stable# 6n the other hand!

"olatile recessions! business cycles in "ery short hori:ons! unsustainable balance of payment

aggregates! high foreign e)change "olatility! sharp ups and downs in fiscal balances! persistently high

or "olatile inflation leading to financial stability concerns are all signs of economic instability! which

may increase uncertainty and discourage in"estment! slow down economic growth and decrease social

welfare# &hen economic instability is minimised! the economic system can increase the .uality of life

by promoting li"ing standards through heightened producti"ity and efficiency that will lead to

sustainable employment le"els#

The definition of financial stability is a comple) matter and different approaches were taken by

different authors in an attempt to find the most ade.uate definition# 6n the final analysis! it can be

portrayed as a con;uncture where the financial system efficiently performs its key economic functions

in terms of efficient allocation of resources! spreading risk as well as settling payments under all type

of stress situations including structural changes and paradigm shifts # $n other words! financial stability may best be

described as the ;oint stability of the key financial institutions operating within financial markets and

the stability of these markets! where economic entities can feel secure that their financial transactions

will be e)ecuted timely and securely #

The financial instability is also a situation in which economic performance is potentially impaired

by fluctuations in the price of financial assets or by an inability of financial institutions to meet their

contractual obligations


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%Fourth Conference of Southeast Europe onetary History !et"ork #SEEH!$


as the rule of law including property rights! a strong feeling of ;ustice and e.ual treatment of citi:ens!

efficient resource allocation! incenti"es for technological inno"ation! an open mind for reforms when

change is needed and a fle)ible approach to re-organisation and re-structuring to adapt to fast changing

global conditions# The fall of the 6ttoman Empire was caused by the loss of these prere.uisites for

sustainable de"elopment which enhance economic stability#

$n the early years of the 'oung Turkish Republic! there were indeed no economic or financialstability concerns# The priority in the early years was hunger pre"ention in order to keep the social law

and order after many years of global and national conflicts that destroyed the ma;ority of human

capital# The already scarce resources to finance a new de"elopment initiati"e were wiped out by the

lack of social rule of law# fter all! the main heritage of the Empire! one of the main losers of the Airst

&orld &ar! was a huge e)ternal debt#

The Turkish Republic was struggling for sur"i"al in the early years# ppro)imately C of the

population! which is about 13 million! li"ed in "illages in the 1920@s# 2C of the working population

was engaged in agriculture! /C in industry! ,C in trade and C in the ser"ice sector# $ndustryDs share

in the national income was only 10C! and the share of agriculture was /C# %owe"er! agricultural

production was "ery primiti"e and in"ol"ed "ery few technological inno"ations# $n the RepublicDs early

year! there were only around 220 tractors in the country# $ndustry met only the most basic needs of thepopulation that was e)periencing e)treme shortage of basic foodstuffs#

$t was not only the lack of resources on the national le"el that created hurdles for economic welfare

creation for Turkey in those early years 5lobal conditions did not help either# The 1929 economic

collapse in the S increased the cost of e)ternal funding as well! and once that turmoil ended! came the

heightened social unrest in Europe leading to the &orld &ar $$# ational and global conditions did not

allow ;ump-starting a proper economic and financial stability progress in the early decades#

6ne may argue that the 19,0s were the first decade in which Turkey had a proper chance of

welfare creation# nfortunately! a military coup disrupted the strong economic reco"ery for a short

period of time# Buring the planned economy of the 19/0s a certain amount of capital was accumulated

to trigger a long-lasting economic and financial stability# %owe"er! the first and second oil price shocksof the 190s once again increased dependence on e)ternal funding for sustainable growth#

The 190 reforms to downgrade the import-substitution based de"elopment strategy in order to

upgrade an e)port-led growth helped to catch a high growth platform for a couple of years but such a

high le"el of re-structuring had its own drawbacks and financial liberalisation policies created a

banking crisis in 193# %owe"er! the reco"ery was fast and Turkey e)perienced strong growth plato for

another decade# Ainancial liberalisation also brought new diseases to potential growth! such as

dolarisation# $nternational financial institutions! such as the $nternational 8onetary Aund ! were

familiar "isitors in those years but this did not pre"ent another hea"y banking crisis in 1997# The 1990s

are generally been accepted as lost years not only because of the 199 earth.uake but also because of

the global financial spill o"er! such as the Russian and the Aar-East crises# The decade ended with a

deep economic crisis in 2001 and the Turkish Economy has been undergoing in-debth re-structuringand reforms e"er since#


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)Fourth Conference of Southeast Europe onetary History !et"ork #SEEH!$


The o"erall economic growth performance of Turkey since 1923 is shown in the chart below# %igh

"olatility in the early years reflects the dominance of agriculture and the impact of good and bad

weather conditions# "erage growth rate during the period was ,#12 percent#

Chart 11

GNP Growth

#Percenta.e$

)%

%(

%'

%+

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0!P 0ro"th ate #at constant prices$ Avera.e

Source: Turkstat2

The rest of the paper is structured as follows The early years of the 'oung Republic from an

economic and financial stability point of "iew will be summarised in the ne)t section# The early

liberalisation period from 197, to 19/0 will be followed by a summary of the planned economy of the

19/0s# Then we will e)plore the second initiati"e for liberalisation in the 190s! which will be followed

by the lost years of the 1990s# The paper will conclude with the re-structuring and reforms periods of

the final decade after the destructi"e economic crisis of 2001#

%# $nstitutional in&rastructure period '"(%)*"(+,-

$t may be argued that the ma;or impact of the collapse of the 6ttoman Empire on the 'oung

Turkish Republic was a huge debt burden# lmost the final ,0 years of the Empire were lost through

wars that ended with border losses and de"astating destruction of an already scarce infrastructure# The

e)tremely costly defence of Bardanelles in anakkale and the Airst &orld &ar destroyed the human

capital and an additional burden of domestic conflicts increased this destruction in the years that

followed# ?ompared to neighbouring countries! 8inor sia infrastructure was insufficient and under-

de"eloped# $t lacked the basic infrastructure for railways! roads! schools! while basic health ser"ices

1ew series 5B+ data were used after year 1999#


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were ade.uate# The industry or manufacturing was a fantasy word as the share of agriculture in the

national economy was dominant! and as the ne)t chart e)hibits! there were sharp fluctuations in growth

rates determined by weather conditions

Chart %

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GNP Growth Rate#Percenta.e$

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Source: Turkstat2

ntil 193/! economic growth rate fluctuated sharply! falling by more than 10 percent in some

years and growing by more than 1, percent in others# lthough Turkey did not enter the Second &orld

&ar! the state defence costs increased fast and these e)penses negati"ely affected economic

de"elopment efforts and lowered the a"erage growth rate# Buring the war years between 1970 and

197,! 5+ growth was negati"e e)cept in 1972# $nflation was under control and the "alue of TR'against the #S# dollar followed a steady course especially after the year 1937#


6/31

Table 1

Selected Economic Indicators

CP3Trade 4omestic 4ebt E5chan.e Hi.hest ) months

Short TermE5port 3mport 6ud.et

3nflation 6alance #illion 7S ate3nterest ate

6ank #illion #illion 4eficit 8)

#9$1:'

#ill ion 7S 4ollar ;ear #TTrkiye@de Enflasyonun Tarihi@=

,/ 7ndersecretariat of Treasury of Turkey2

fter 1930! the countryDs foreign trade was in surplus# Especially in the first half of 1970s! trade

balance surpluses dominated the e)ternal trade indicatiors# ?onsumer +rice $nflation


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all underde"eloped but there were some incenti"es to shape up the national banking system despite

enormous challenges# There was a non-monetary base in trade and transactions! implying e)istence of

barter economy# State support and the countryDs economic conditions led to the establishment of a

monopolistic banking s an almost closed economy without national central bank in an en"ironment

in which credit was channelled mainly by foreign banks and credit powers o"er a long period! there

was no chance for pri"ate banks to emerge #

The primiti"e agricultural production base and underde"eloped market structure pre"ailed in an

underde"eloped socio-economic framework# There was only one state bank! 17 foreign banks and

domestic banks in Turkey in 1923# $n si) years! 27 pri"ately owned domestic banks ;oined the financial

system by 19292# Escaping from the financial crises while still learning banking in the early years! and

e"en resisting the effect of the nited State@s 5reat Bepression of 1929 with almost perfect fiscal

discipline! enabled the emergence of a mi)ed pri"ate-public banking system that eased the burden of a

financial re-de"elopment and re-structuring# 4etween 1923 and 1932! more than 20 local banks were

gone bust mostly because of the 5reat Bepression #

ma;or de"elopment for the financial system of the country was the establishment of the ?entral

4ank of Turkey in 1932 # &ith the emergence of pri"ate banks which followed the creation of the

central bank! basic financial architecture was almost complete# %owe"er! as a damage control strategy!

the main efforts between 1939 and 197, were focussed on keeping the impact of &orld &ar $$ as low

as possible# $t may be suggested that in "iew of the global economic and financial conditions! the

approach to economic and financial stability applied in this period! should be considered successful# $t

was constructi"e to stay away from the war and rationally use scarce resources! and at the same time!

accumulate some capital rather than spend it all on the defence# Turkey was kept in the right

positioning for the re-structuring and re-de"elopment strategies of the post-war economic policies#

)# .ovin/ towards an open economy '"(+0*"(,(-

The preference of a common public and pri"ate ownership model of de"elopment in the earlyperiod was not a choice of good will but a forced alternati"e since! lacking capital accumulation! there

was no pri"ate wealth creation potential# s soon as the destructi"e impact of the Second &orld &ar

ended in mid 1970s! strong subsidies were allocated to support the ;oint ownership model of public and

pri"ate enterprises# %ea"y state in"ol"ement in economic acti"ity was rela)ed and pri"ate

entrepreneurs were gi"en incenti"es to apply aggressi"e in"estment strategies# s the ne)t chart shows!

a"erage growth rate during the period came as high as !3, percent thanks to the e)treme performance

in 197/#

2 Silier 6# 19,! 1920@lerde THrkiye@de 8illi 4ankacIlIJIn 5enel 5GrHnHmH! THrkiye Kktisat Tarihi Semineri!%acettepe#


8/31

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GNP Growth Rate

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Source: Turkstat2

Buring the period obser"ed! ?+$ was moderate and fluctuated from F/#/ percent to # percent

until 19,,! but the second half of the 19,0s had a bad track record in this respect# Buring that period

there was no pressure or no crowding out of the pri"ate by the public sector through unsustainable

budget deficits# E)change rate regime fa"oured the fi)ed rates rather than a competiti"e de"aluation in

the second half of the 1970s before ;oining the 4retton-&oods# $n search for a realistic currency "alue!

the TR' was de"aluated against the #S# dollar by ,0C on September 197/# 6ne of the weaknesses

of such an arrangement appeared as a chronic current account deficit! especially during the second half

of the 19,0s#


9/31

Table %


CP33nflation

#9$1:%

4omestic 4ebt#illion 7S 4ollar

;ear End$):,

6ud.et4eficit 80!P

)

E5chan.eate #TEkonomimi?in 1&%)@den 1&&+@a Saysal 0Brnm@=

'/ 4oDruel F2 >Trkiye@de Enflasyonun Tarihi@=


6n the road to a small open economy! financial stability in Turkey in the second half of the 19,0s

did not ha"e a bad track record# +ri"ate banking had a licence to e)pand fast when public banks ga"e

some space to them# The then decision makers fa"oured liberalisation and market economy principles!and de"elopment :ones reached inner natolia with increasing in"estment in infrastructure# 8iddle and

upper classes took a breath and pri"ate wealth accumulation rate reached the highest le"els# E"en under

controlled deposit and credit interest rates! number of pri"ate banks increased sharply# nother

characteristic of this period was the enhancement of branch banking# There was a rapid increase in the

number of branches of banks between 197,-19/0 in Turkey# Thirty new banks were established

and the number of banks reached ,9 compared to 72 in 1977#

+# Planned economy and oil price shocks '"(01*"(21-

fter trying a liberal approach to the de"elopment strategies in the 19,0s! the tactic was changedin the 19/0s! and if the first half of the 19,0s may be called the first (golden years* of Turkey in terms

of growth! the second (golden years* were in the 19/0s#


10/31

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Chart '

GNP Growth Rate

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(

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Source: Turkstat2

The de"elopment paradigm during this period was shifted in fa"our of import substitution based

growth# The framework was .uite transparent There was a , year plan prepared by wise guys in the

State +lanning 6rganisation and appro"ed by the elected decision makers The end result was a long

period of sustainable growth of around , percent# Buring this period! e)tremely detailed plans captured

e"ery le"el of priorities regarding the production and distribution channels in the economy# The role of

the public sector increased in the conduct of economic acti"ity#


11/31

Table )


CP3

3nflation

omestic 4ebt#illion 7S

6ud.etE5chan.e Hi.hest Short

3nterest ateCurrent

4eficit 8

Savin.#9$

1' 4ollar ;ear End$ ) #TEkonomimi?in 1&%)@den 1&&+@a Saysal 0Brnm@=



$n the 19/0s! ?+$ was low and stable= there were no ma;or fiscal imbalances and the e)change rate

was rather stable# There were no balance of payment imbalances either# $t was almost a magical

economic performance and income distribution gained some breathing space allowing it to! at least

partially! repair the ine.ualities#

This picture changed rapidly in the 190s and a hidden fragility of the 19/0s came to the scene

Bependence on energy imports# s oil prices increased sharply! not only once but twice! the economy

failed to adapt to high-energy prices and the economic policy makers lost sight of the medium and long

run but rather concentrated on short-term solutions# Aoreign e)change rate guarantees increased

contingent liabilities of the public sector and ad"ances to the Treasury from the ?entral 4ank printing

machines created a persistently high and "olatile inflation# Buring this period! Turkey fell into a

double-digit inflation trap# $nstead of ha"ing a multi-party coalition implement medium and long-term


12/31

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economic and financial stability programs for a couple of years! domestic conflicts among social

groups increased the cost of solutions to the crises and Turkey ended 190s with an inflation rate of

abo"e 100 percent# Ai)ed e)change rate regime became unsustainable because of the black market

rates! while public sector borrowing re.uirements increased to such high le"els that crowding out

became a norm in the years that followed# E)ternal account imbalances only created additional

problems and did nothing to help decrease the pressure#

s e)pected! there were no catastrophic problems on the financial stability front# The reason was

being the lack of market influence on deposit and credit interest rates in addition to negati"e interest

rates imposed on the banking system by the regulators# ?entral bank independence was a far away

dream and nobody talked about it when the economic acti"ity collapsed so badly due to a shortage of

raw materials for the production of basic goods! including energy# d"ances to the Treasury were

regularly granted and public banks increased their dominance in the financial sector because of the

critical importance of credit to the pri"ate sector#

Ainancial stability during this period may also be e)plained by the lack of an in-depth financial

market or (bankisation*# Ainancial markets were .uite shallow# 4anks@ asset .uality! li.uidity and

profitability impro"ed steadily whereas capital ade.uacy deteriorated as shown in the chart below

Chart ,

Financial Strength Sub-Indices

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11+

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13/31

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s e)pected! early 19/0s e)perienced a sharp financial deepening when credit to 5+ ratios more

than doubled# Total assets to 5+ ratio also displayed a similar trend# %owe"er! as e)plained earlier!

oil price shocks discouraged this tendency and financial deepening eroded sharply so that the le"els

recorded at the end of period were almost identical to those at the beginning of the period# This period

was generally regarded as the root-cause of institutionalised short-sighted monetary and fiscal policy

implementation failures# 6ne may also argue that the 190s were the maturing period of the lost

decades in Turkey in terms of economic and financial stability #

Chart *

Financial Deepening

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,+

)+

',

%,

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Credits 8 0!P Total Assets 8 0!P #i.ht A5is$

Source: The 6anks@ Association of Turkey #6AT$


14/31


15/31

Table '


CP33nflation

#9$1:'

4omestic 4ebt#illion 7S4ollar ;ear

End$):,

PS6 804P

1

E5chan.eate

#TTrkiye@de Enflasyonun Tarihi@=


The main problem that was addressed properly during this period was inflation# lthough it

declined to 2 percent in 192! inflation remained persistent and ne"er fell back to single digits for

another two decades# t the same time! chronic public deficits crowded out the pri"ate sector in almost

e"ery year and the burden increased annually# 4alance of payment imbalances only increased the

problems of the fragile economic stability#

6n the financial stability front! the first shock were bank bankruptcies of the early 190s#

6b"iously! those bankers constructed indi"idual pon:i games# The banks that collapsed were forced tomerge with public banks! which was the early misuse of public banks# that in the decades that followed#

The reform agenda of the 190 failed to achie"e a high le"el of regulatory and super"isory .uality!

while la) approach to market economy led to the accumulation of certain pressures that were carried

o"er into the following decades# 8anaging the change was a difficult task and financial market

infrastructure needed a better o"ersight! which the Turkish economy learned later on at a hea"y price#

nder high and "olatile inflation! performance of the banking sector was not terribly bad! but the banks

were not gaining regular power either# Shortening of deposit terms and increased pressure of

dollarisation added e)tra pressure on the banks# $n mid-190s! banks were allowed to collect foreign

e)change deposits and dollarisation was institutionalised#


16/31

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17/31

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Financial Deepening

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The financial liberali:ation process pro"ed costly in the years that followed! but still! without those

measures! it would ha"e been more costly to stabili:e the economy! both in terms of internal and

e)ternal accounts# The 190s already pro"ed unsustainable with import substitution based de"elopment

strategy because of the e)ternal account bottlenecks for the import of basic needs# $nternational crises

did not help the Turkish economy in those years either# Europe and the S were trying to sol"e their

inflation problems by following e)tremely high interest rate polices# 4ra:il! 8e)ico and rgentina debt

crises placed additional burden on the Turkish economy and Europe was struggling to create its own

single currency# $n this con;uncture! once the priority of low and stable inflation was delayed in fa"ourof increasing infrastructural in"estment! internal account balance deteriorated each year and all types of

well known costs of high inflation engulfed the economy step by step#

0# ost years '"(("*%11"-

The worst economic performance of Turkey was recorded in the 1990s! which is generally

accepted as a lost decade by the academicians and practitioners# %owe"er! it was surprising that though

inflation was high and "olatile since 192! hyper-inflation ne"er became an issue# "erage growth

performance! on the other hand! was the worst e"er! reaching less than 7 percent! which is below the

performance during the 1930s#


18/31

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Source: Turkstat2

6ne possible e)planation for the persistent high inflation short of hyperinflation may be the lack of

financial deepening under capital controls and allowing the asset and liability dolarisation after capital

controls were abolished# +ublic banks were also used e)cessi"ely in order to co"er up temporary

bottlenecks# nother argument may be that unofficial economy blocked all hyperinflation risks by

pro"iding fle)ibility under stress#

$n this period! a"erage inflation was / percent at its highest and the current account balance

produced structural deficits# Bomestic debt stock increased regularly as the public sector borrowingne"er fell below 3! percent and the period a"erage was realised at abo"e percent#


19/31

Table ,


CP33nflation

#9$1:'

4omestic4ebt #illion7S 4ollar:

;ear End$):,

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6ne particular e"ent during this period was the 1997 financial crisis 4ecause of unsustainable

fiscal balance and insufficient primary surplus to counter-balance e)ternal deficit fragilities! the

economy fell into the traps of twin deficits# ?onstantly delayed stabilisation program shattered the

ner"es of financial market participants! and in Manuary 1997! Turkish lira faced sharp depreciation after

more than a decade# 4ecause of the timing of local elections! desperately needed economic package

came three months later! and at one point! the Treasury had to sell bonds with a maturity of threemonths at an interest rate of ,0 percent# These shock rates helped ease the unbearable le"els of

"olatility and a new deal with the $8A helped to turn e)pectations into the positi"e realm# %owe"er!

one way or another! the $8A deal was not implemented properly in the years that followed and the

terrible earth.uake in the second half of the 1990s further diminished any hope of a sustainable

reco"ery#


20/31

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Chart 11

Financial Deepening

)% &,

&+

)+(,

(+%(

-,

%* -+

*,

%'*+

,,%%

,+

%+ ',

Credits 8 0!P Total Assets 8 0!P #i.ht A5is $

Source: 6AT2

Buring the lost years of the 1990s! financial deepening was mainly shaped by credit e)pansion

through public banks and creati"e credit e)pansion tactics of banks using instruments such as back-to-

back credits# Structural problems of the economy that were accumulating since 192 waited for a

reform agenda in order to decrease high and "olatile inflation and bring the economy to a sustainable

growth path at least close to its potential# &ith this aim in mind! an e)change rate based stabili:ation

program was signed with the $8A in 1999 implying reforms such as establishing an independent

super"isory and regulatory banking authority to increase the .uality of financial stability# +ri"atisation

was put on the high alert agenda! which was a dramatic story because Turkey started its pri"atisation

calendar before the fall of the 4erlin &all# %owe"er! while countries like the ?:ech Republic and

%ungary completed their pri"atisation programs! Turkey@s performance fell far below the cost of

pri"atisation itself# &ith the pri"atisation of the Turkish Telecom and the lack of any "alue assessment

whatsoe"er came the early signs of financial markets stress in o"ember 2000# n additional financial

aid package from the $8A was not sufficient to pre"ent the worst e"er economic crisis in Turkey#

E)change rate based stabilisation program collapsed and foreign e)change rate regime was changed

o"ernight in fa"our of the floating e)change rate regime! which led to a sharp depreciation of the

Turkish lira# The number of banks facing bankruptcy was increasing gradually since ugust 2000 and

peaked after the depreciation of the Turkish lira# The o"ernight interest rates increased to , digits!

which was .uite uncommon in literature# The de"astating impact of the economic crisis left no

alternati"e other than signing of another $8A deal#


21/31

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22/31

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Chart 1)

GDP Growth Rate

#Percenta.e$

1+

&

(

-

*

,

'

04P 0ro"th ate #at constant prices$ Avera.e

Source: Turkstat2

There are two main pillars of the new stabilisation program $nflation targeting and floating

e)change rate regime# $nflation targeting was implemented implicitly until 200, when e)plicit

targeting took the role# 6ne among so many critical reforms was that the independence of the ?entral

4ank of Turkey! where short-term ad"ances to the Treasury were forbidden! was incorporated into the

Law including a ban on the purchase and sale of Treasury bonds and bills in the primary market#

8onetary +olicy ?ommittee was established for the purposes of interest rate setting! while credibility

and transparency of the ?entral 4ank are guaranteed by the new memorandum of understanding#


23/31

Table *


CP33nflation

#9$1:%

4omestic 4ebt#illion 7S

4ollar;ear End$

):,

PS6 804P

1

E5chan.eate

#TTrkiye@de Enflasyonun Tarihi@,/ 7ndersecretariat of Treasury of Turkey

The successful implementation of the stabilisation program may not ha"e been possible without the

full commitment to the fiscal discipline that was defined as /#, percent primary surplus# 6wing to this

commitment! public sector borrowing re.uirement fell from 10 percent to the negati"e :one in some

years# 6ne of the main achie"ements of the program was the fall in inflation to single digits!

unprecedented since the 190s# E)change rate "olatility also eased and some years e"en saw

appreciation of the e)change rate#

$t may be argued that global li.uidity s.uee:e should ha"e helped in this con;uncture and the

argument is well taken# %owe"er! without full commitment! which may be confirmed with the

successful completion of a Stand-by agreement with the $8A! a case ne"er seen before! the targets of

the program may not ha"e been reached! as has been the case with the early deals with the $8A since

19/0#

Successful implementation of the pri"atisation scheme also helped ease the cost of crowding-out#

6nce the Treasury started to collect the re"enues from sold assets! debt rollo"er ratio was reduced

significantly and cash balances increased sharply to decrease the risk premium# The ?entral 4ank also

gained credibility by achie"ing the inflation targets and when this was not the case! by e)plaining

successfully the reasons for the underNo"ershooting of the targets#

There was one side effect of all these achie"ements The delayed in"estment during the turmoil

years increased the need for e)ternal funding! which was also supported by the low le"el of domestic

sa"ing rates# 4alance of payment imbalances increased their impact towards the end of the period# $t

may be worth mentioning that when si) :eros were dropped from the Turkish lira! de facto

3 t the beginning of 200,! si) :eros ha"e been dropped from the Turkish lira#


24/31

con"ertibility was also gained as confirmed by the issuance of TR' bonds by international financial

institutions#

4anking sector increased its performance in e"ery year during this period# ?redit and deposit rates

decreased to le"els ne"er seen in the last three decades and re-structuring and re-capitalisation after the

2001 crisis paid back well as the "ulnerabilities of the sector disappeared one by one# sset .uality and

profitability rose to unimaginable le"els and there was a heightened interest from international banks tobuy a bank or to look for opportunities for mergers and ac.uisitions# 4anking sector capital ade.uacy

ratio increased regularly as well# +ublic banks@ burden on the system diminished after the re-

organisation# Ainancial Stability Report was produced to gi"e an independent assessment of the

financial system# Together with the $nflation Report! which was introduced a couple of years earlier!

the ?entral 4anks communication set was completed#


25/31

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26/31

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The Turkish economic and financial stability struggle was in for a turbulent road from the1920s to

200# %owe"er! the current performance of the economy is .uite strong# $t is belie"ed that the

successful implementation of the 2002 stabilisation program was the main factor behind such

achie"ement # Ainancial stability in Turkey is .uite resilient to the current global crises as the ne)t chart

e)hibits and Turkish banks ha"e been .uite profitably e"en during the last two turbulent years# ow!

the challenge is to adapt to the European nion standards#

Chart 1,

Financial Soundness Indicator

1),

1)+

1%,

1%+

11,

11+

Financial Soundness 3ndicator

Source: The Central 6ank of Turkey

6ne of these challanges is to strengthen the credit channel in Turkey# $n order to achie"e this

target! the financial deepening needs an additional acceleration# ?ompared to the E countries! the

figures are .uite low both in terms of total assets to 5+ and credit to 5+ ratios# Turkish banking

system has pro"ed "ery resilient to the current global crises# 6nce the destructi"e impact of the crisis

eases in the years to come! banks will be well positioned to close this financial deepenning gap and

increase their share in the economic acti"ity# $t may be argued that a stronger banking system will

decrease the cost of adaption to the E standards#


27/31

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Chart 1*

Financial Deepenning Indicators

), -+

)+ *,

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*+

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Source: The Central 6ank of Turkey

2# !onclusion

The independence of the Republic of Turkey was declared in 1923# $nitial conditions after the

collapse of the 6ttoman Empire were not ideal for a ;ump-start of economic acti"ity that would lead to

strong growth rates without structural reforms and re-structuring# There was no hard currency inherited

and operating capital was so scarce that central banking was outsourced to Arench bankers# The basic

element for sustainable growth! human capital! was insufficient and inefficient because of long wars

and conflicts that led to destruction of producti"e human capital#

$n the early decades after $ndependence! the priority was gi"en to institutional reforms for a

sustainable growth path under low inflation and financial stability# To this end! the rational approach of

the 'oung Republic to the finance and banking managed the risk of a banking or a financial crisis

carefully and confronted the total collapse of already scarce capital accumulation potential#

%eightened political unrest in Europe leading to the &orld &ar $$ forced the 'oung Republic to

rely on a (mi)ed* system for sustainable growth and financial stability# 6n one hand! pri"ate

in"estment and ownership were gi"en incenti"es including direct capital in;ection for the production

andNor distribution of basic consumption goods# 6n the other hand! the State in"ested in sectors that

were strategically important for po"erty and hunger reduction# The mi)ed economic system of

de"elopment did not pro"oke high inflation rates or lead to financial chaos e"en under e)treme globalrisk perception during those difficult years#


28/31

The end of decades of global wars and conflicts pro"ided new opportunities for a new paradigm to

sustain growth and financial stability# +ri"ate ownership and greater participation of pri"ate capital in

economic acti"ity were gi"en additional incenti"es# +ri"ate banking de"eloped fast with the emergence

of new banks# 8arshall aid package also pro"ided a new capital base for infrastructural in"estment#

Turkey e)perienced high le"els of growth and strong total factor producti"ity in the 19,0s# There was

no serious pressure on financial stability other than small-scale balance of payment difficulties leading

to de"aluations# E"en with strengthened policy towards liberalisation during 19,0s! public banks

e)tended their leading role in the financial system because of the general shortage of capital#

fter the military coup in the 19/0! an import-substitution growth strategy was initiated .uite

successfully and the Turkish economy e)perienced the best growth performance of its short e)istence#

semi-socialist planning strategy successfully dominated the Turkish economy with (fi"e-year plans*

influencing banking and finance as well# clear list of strategically important sectors was announced

and supported through all kinds of incenti"es! from ta) e)emptions to pro;ect finance credits or ease of

access to credit through guarantees# $n the early phase of its implementation! the program based

de"elopment strategy pro"ided high growth rates under low inflation rates#

&ith hea"ily regulated interest and foreign e)change rates! branch banking became a norm without

any pressure of competition in the 19/0s# +ri"ate entrepreneurs relied on (holding banking*7! whichwas also encouraged by ta) incenti"es# $ndustrial holding companies wanted to ha"e a bank in order to

finance their potential in"estments as most of the deposit base of the financial system was strictly

channelled to (planned* or (programmed* prioritised in"estment pro;ects# Then came the oil crisis of

the 190s and took away all the resources for the emergence of strong pri"ate banks# The capital

accumulated in the last decade was wiped out by the balance of payment crises# The 190s may best be

defined as lost years partly because of shortsighted monetary and fiscal policies but also because of the

increased political tension within the society# Lack of sufficient hard currency reser"es .uite often led

to de"aluations and a strategic mistake to dollarise the central bank balance sheet sharpened the

destructi"e effects of the turbulence# "erage growth rate for the decade fell sharply#

fter the balance of payment crises and serial depreciations in the second half of the 190@s! a

liberalisation initiati"e triggered free setting of deposit and credit rates to support market discipline#

The second half of 190s was the period when pri"ate banks began winning a market share# Aollowing

the strong growth performance of the 19/0s! a new period of strong de"elopment began! but unlike

during the 19/0s! high and "olatile inflation turned out to be persistent as well# The chart below

e)hibits the annual growth rates from 1923 onward

7 The term refers to priorising irrationally a group company in credit allocation#


29/31

1&%'

1&%(

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1&'+

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Chart 1-

GDP Growth

#Percenta.e$

)%

%( %'

%+

1*

1%

(

'

+

/'

/(

/1%

/1*

04P 0ro"th ate #at constant pric es$ Avera.e

Source: Turkstat2

ccumulation of capital in this decade came at a price The bankers crisis in 193! which had

emerged as a pon:i game! wiped out certain gains in this area# Sustainable growth with low and stable

inflation remained a distant dream#

The 1990s may be described as another (lost decade* in terms of banking and financial stability#

The 1997 banking crises played a critical role in this definition# %owe"er! due to the lack of dedication

to social welfare and economic re-structuring! fiscal deficits crowded out so much that the whole

banking system fell into another crisis in 2001# Replacing the import-substitution growth strategy of

the 19/0s with e)port-led growth strategies re.uired a competiti"e e)change rate policy that came at a

price E)change rate pass-through created a "icious-circle of de"aluations followed by heightened

inflation persistence# 5rowth rate "olatility increased sharply and both economic and financial stability

became an unreachable targets without e)ternal aid# The $8A agreements came one by one and none

was followed by successful implementation# The liberalisation of capital account to eliminate all

controls and to declare (de ;ure* con"ertibility was ill-prepared in 1990 without financial reforms and

high .uality super"ision and regulation# Ainancial system failed to adapt to the new paradigm and

banks were often bailed out through nationalisation#

Since the 1997 banking crisis! the Turkish economy in general! and banking system in particular!

relied hea"ily on $8A agreements for both credibility gains and e)ternal balance sustainability# n

e)change rate based stability program in 2000 failed to gi"e a boost to economic stability and the 2001

financial crisis wiped out another round of capital accumulations#


30/31

fter 2002! Turkish economy e)perienced a "ery high le"el of growth that came with low and

decreasing le"el of inflation# "ery long list of reforms and re-structuring programs! including

banking and finance! supported this paradigm shift# s a candidate economy to the European nion!

Turkey has been declared a market economy and the current challenging target is to adapt the

producti"ity and efficiency to the European le"els# The global crisis that has been dominating the

world since ugust 200 has made free access to e)ternal finance e"en more difficult# Turkish

economy is now facing the challenging task of increasing domestic sa"ings to support sustainable

growth under low and stable inflation and support domestic demand to get rid of the risk of recession

without increasing the risk premium#


31/31

4e&erences

?hant! M#! 2003! (Ainancial Stability s a +olicy 5oal!* in Essays on Ainancial Stability! by Mohn

?hant! le)andra Lai! 8ark $lling! and Ared Baniel! 4ank of ?anada Technical Report o# 9,

#

?rockett! #! 199! The Theory and +ractice of Ainancial Stability! 5E$ ewsletter $ssue o# /! nitedOingdom! 5on"ille and ?aius ?ollege ?ambridge! 11F12 Muly#

Ba"is! E#+#! 1999! Ainancial Bata eeds Aor 8acroprudential Sur"eillance- &hat are the Oey

$ndicators of Risks to Bomestic Ainancial StabilityP! ??4S %andbooks in ?entral 4anking Lecture

Series! o#2#

Beutsche 4undesbank! 2003! Report on the Stability of the 5erman Ainancial System! 8onthly Report!

Arankfurt! 5ermany#

Bogruel A#! Bogruel #S#! 200,! QTHrkiye@de Enflasyonun Tarihi@! Tarih akfI#

Aerguson! R#! 2002! (Should Ainancial Stability 4e n E)plicit ?entral 4ank 6b;ecti"eP*

Documents

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