The Turkish lira dived by 30.5 percent Thursday, February 22, as the government scrapped a pegged exchange rate, the backbone of an IMF-backed anti-inflation drive.
The government was urgently looking at ways to revise its battered economic strategy amid angry calls for its resignation, adding political pressure to its economic pain.
The lira fell against the dollar from 689,000 on Wednesday to 991,669 on Thursday afternoon, and the Turkish currency depreciated by as much as 36 percent in the day.
A second financial turmoil in three months forced the government to let the lira float after a 13-hour emergency meeting that ended before dawn.
Share prices, which had slumped by 18 percent on Wednesday, rallied by 9.8 percent, but dealers warned that the turbulence in the stock market was far from over.
The government, meanwhile, asserted that the struggle against inflation, which hit 39 percent in 2000, would continue and began looking for revisions in its three-year anti-inflation program, launched in December under a stand-by deal with the IMF.
The Fund lent support to Turkey and sent its Turkey desk chief to Ankara to discuss changes in macroeconomic policies, but credit agencies Moody's and Fitch downgraded the country's debt ratings.
IMF chief Horst Koehler said Turkey and the Fund "will explore the possibilities of making resources available under the program (from a four-billion-dollar stand-by credit from the IMF) to cover some of the increased fiscal costs of bank restructuring."
"Continued fiscal adjustments and a strict monetary policy should help stabilize the exchange rate and ensure — possibly after an initial increase — that the inflation rate continues to decline," he added.
Despite the IMF nod, the government came under fire at home with labor unions and opposition parties calling for a cabinet reshuffle and even the government's resignation.
In Washington, US Treasury Secretary Paul O'Neill said the United States backed Turkey's decision to float the Turkish lira. “We fully support the government of Turkey's actions today to float the Turkish lira," O'Neill said in a statement.
The sudden drop in the lira would force up inflation, drag down economic growth and sharply jack up the cost of paying for Turkish debt denominated in dollars, Val Koromzay from the Organization for Economic Cooperation and Development (OECD) told AFP in Paris.
Ankara's original inflation targets were pinned at 12 percent in consumer prices and 10 percent in wholesale prices for the end of 2001.
"The steps to be taken should be completed with a general reshaping of our economic strategy for the coming months and years," said a joint statement by Economy Minister Recep Onal and central bank Governor Gazi Ercel.
The two officials said that inflation targets, the cost of restructuring banks and budgetary factors would be revised. Onal told the all-news NTV channel later that inflation could still be brought down to single-digit levels at the end of 2002.
But Prime Minister Bulent Ecevit remained vague on possible changes. "We have not yet had the opportunity to discuss details. Everything will become clear in the coming days," he told reporters.
The Turkish central bank said it would "play an active role at the markets" to establish new balances and to protect gains made against inflation in the past 14 months.
The latest crisis, which saw a severe cash crunch and interest rates sky-rocketing to 4,000, followed a similar turmoil in November, from which the markets had just begun to recover, with the help of about $10 billion of IMF rescue aid.
Ankara had promised at the time to accelerate privatization and reforms in its ailing banking sector, where the turmoil originated, but accomplished little in the meantime amid political wrangling.
On Thursday, it pledged again to outline speedily more efficient policies for the sale of 11 bailed-out banks and reforms in ailing public banks as well as for the privatization of Turkish Airlines and Turkish Telekom.
The Turkish markets were gripped by panic on Monday, February 19, after an unprecedented row between Ecevit and President Ahmet Necdet Sezer over corruption sparked fears of political instability, which added to the already volatile climate.
"The political crisis triggered the turmoil, but the gun was already full," economist Ege Cansen said in reference to the government's failure to address in earnest the economic troubles after the November crisis. — (AFP, Ankara)
by Sibel Utku
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)