Cost of bank reform is central to Turkish crisis plan

Published December 7th, 2000 - 02:00 GMT

Lasting confidence in the IMF-backed crisis plan for the Turkish economy depends upon the cost of cleaning up the banking sector and on monetary policy, an OECD expert said on Wednesday, December 6. 


Commenting on massive aid being signaled by the IMF and World Bank, and on a statement of crisis measures by Turkish Prime Minister Bulent Ecevit, OECD expert Robert Price said in a telephone interview: "The problem of the banks is going to be quite expensive." 


Saying that he understood IMF aid mentioned by Ecevit of $10 billion to include part of an existing facility, but to be in addition to extra funding of $5 billion mentioned by the World Bank, Price said that these were big amounts. 


He commented: "In the short term this is important to shore up the exchange rate of the lira and to halt the outflow of capital, and also for long-term restructuring." 


Price, the head of the division for Turkey at the Organization for Economic Cooperation and Development (OECD), said: "The policies they were following were appropriate and the lira was not over-valued, and is sustainable provided that agreement can be reached with the labor unions on the feasibility of the original 12 percent inflation target." 


Price explained: "Because there were political delays and opposition to reforms to clean up the banks, confidence began to sap away, initiating the crisis. 

"And banking reform remains central, including the need to be absolutely transparent about how much the clean-up will cost in budgetary terms." 


Price said that the central challenge was a need to provide liquidity to the banks at the same time as restructuring was pursued. 


An inflow of foreign capital generated by the IMF aid would enable the Turkish authorities to sterilize liquidity they had injected domestically in the last 10 days, but which was inflationary. 


External, long-term capital used for restructuring, to improve the function, or "supply side" of the economy, would increase productivity and would pose less or little inflationary pressures, Price explained. 


The liquidity crisis had erupted because the authorities had used a high exchange rate and tight monetary policy to slash inflation, but while the main banks were strong, weak secondary banks relying on high-yielding bonds for income, had been squeezed as inflation fell.— (AFP)  


© Agence France Presse 2000  

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