Turkey has been set back years by flotation of the lira which shattered an IMF-backed plan and it now faces a massive task in drafting a new program, analysts said on Friday as the currency and stock market rallied.
The lira was showing an overall depreciation of 21.3 percent on Friday and observers said that the decision to abandon a peg to the dollar means that the original economic targets agreed with the IMF in December 1999 are history.
"They will now prepare a new program, which will be less ambitious, for instance without deadlines," a foreign analyst told AFP. "The new strategy will be based on the same elements — banking reform, privatization, tight budgetary policy. But accomplishing the original targets, set for the end of 2002, are now delayed by years," he added.
The lira showed a strong rebound, since it had fallen by 30.5 percent on Thursday. The stock market also rallied, gaining 1.8 percent, following a gain of 9.8 percent on Thursday and a slump of 18.1 percent on Wednesday
But experts said that the damage caused by the crisis and collapse of the currency would be seen in rising prices, slowing economic growth and increasing debt payments, dominated in dollars.
Turkey's inflation stood at 39 percent in 2000 and the government was aiming to reduce it to 12 percent in 2001 and five percent in 2002.
"The depreciation of the lira will be around 30 percent, the prices will rise between 15 and 20 percent and therefore inflation will be around 40 percent at the year-end," said a foreign expert who declined to be named.
Observers also predicted massive damage to banks, which have large foreign currency debt and stocks of government bonds in Turkish lira.
The banking sector, crowded and weak, had already been hit by a cash crunch in November, which resulted in skyrocketing interest rates. The IMF stepped in then with conditional rescue aid of about $10 billion.
"The first to suffer will be the big banks, who had been credible enough to borrow foreign currency on the international market," an Istanbul-based foreign banker said. "It will be dramatic for them. In one day, they probably lost a big part of their profits in one year," he added.
The rising dollar would also put an additional burden on Turkey's external debt payments. These would be affected by high interest rates and fall of tax revenues due to inflation-triggered economic recession.
"Devaluation and inflation will turn the budget upside-down, and of course, there will be union pressure on the government to hike wages," economist Tevfik Gungor wrote in the financial daily Dunya.
Turkey's top economy officials, central bank governor Gazi Ercel and Economy Minister Recep Onal, said jointly on Thursday that "a general reshaping of our economic strategy" is needed, including revisions of inflation targets, the cost of restructuring banks and budgetary issues.
And even though the IMF Turkey desk chief Carlo Cottarelli had already started talks in Ankara on apparent revisions, Prime Minister Bulent Ecevit remained vague on changes in inflation targets and ruled out budgetary modifications "for the moment".
With the lira cut free, "the reference points of the economic program are eradicated, but the new rules of the game are not determined yet", Guven Sak wrote in the liberal Radikal. "Please shed light."
Observers agreed that the depreciated lira would help boost revenues from tourism and exports, which suffered considerably in 2000, but stressed that this would not be enough to boost the economy.
"The devaluation will bring us to a point far behind from where we started 14 months ago with the original program. The things will not be bad as before, but worse," Gungor said.
Increasing political pressure, meanwhile, will pose further hardships to the government, whose credibility is already badly damaged.
In response to IMF support after the November crisis, Ankara had pledged to speed up privatization and reforms in the banking system, where the turmoil originated, but accomplished little amid political wrangling. — (AFP, Ankara)
by Sibel Utku
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
