The Turkish central bank injected foreign currency on Monday, February 26, and the lira firmed, but analysts warned it was a short-term measure and that stability would depend on political will to draft a credible new anti-inflation plan. The lira showed an overall post-flotation depreciation of 29.6 percent, and the stock market continued to recover against the background of persisting uncertainty about the new strategy.
One analyst in London commented that the military could play a key role in putting pressure on politicians to apply reforms. The lira was quoted at 978,330 to the dollar on Monday afternoon from 1,079,375, which represented a 36-percent depreciation on Friday after the second financial crisis in three months had forced the government to abandon a pegged exchange rate policy.
The International Monetary Fund's (IMF) plan was the backbone of a disinflation program. The Istanbul stock exchange gained 535 points, or 6.4 percent, to close at 8,880 points, almost completing a recovery from a record 18.1-percent fall last Wednesday that was triggered by a public dispute between Prime Minister Bulent Ecevit and President Ahmet Necdet Sezer over corruption.
Overnight interest rates on the interbank market, meanwhile, fell to 102 percent overall after shooting to 4,000 percent last week. But central bank governor Gazi Ercel and treasury undersecretary Selcuk Demiralp took the fall for the economic troubles, with deputy prime minister Mesut Yilmaz confirming late Monday that the two had resigned.
"Deputies are now taking care of the treasury and the central bank. We have started work for new appointments in the shortest possible time," Yilmaz said after meeting with Ecevit and their third coalition partner, Devlet Bahceli. Observers said that the central bank had injected about $800 million in total for three days at an interest rate of 40 percent, but warned that this could not bring about long-term improvement.
An Istanbul-based foreign banker told AFP on condition of anonymity: "This is a provisional measure until the government outlines its new economic strategy." The reasearch head at Disbank, Haluk Burumcekci, said that the central bank aimed at "preventing panic and easing the money crunch," but also said that it was a short-term measure.
"The central bank should in no way let its foreign currency reserves be depleted. We are waiting to see what the government will decide to do in the long-term," he said. The government has said it must now draft a new economic strategy and revise upwards inflation targets.
The flotation is also expected to slow growth, increase strains in the severely troubled banking sector, and to increase burdens on the budget. So far the government has been vague about new measures. On Monday the IMF's Turkey desk chief, Carlo Cottarelli, continued talks with senior economy officials in Ankara.
Experts said that political wrangling last week had merely been a catalyst, because a crisis had been brewing due to failure by the government to get to grips with reforms.
In London, the emerging markets expert at ING Barings bank, Philip Poole, describing fluctuations of the lira as "volatile". He commented: "It was a political problem that was the crux of the breakdown in confidence. The political bridges have to be repaired. "The role of the military will be crucial, to what extent the military puts the pressure on politicians to get their acts together. Politicians really failed miserably in the last week and a half."
Now that the currency peg had been abandoned as an anchor for forcing inflation down, another anchor was needed, most likely through direct targeting of the inflation rate. “The problem with an inflation-targeting nominal anchor is that you still have high inflation well above 30 percent, so it will be difficult to put that program into place."
He observed: "The central bank is trying to stabilize markets ... and pumping liquidity into the system both through the overnight repo in lira and putting dollars back into the system. "One report said they put just under $500 million of dollar financing into the market, which is not large in relation to central bank flows which we saw last week, when reserves were down on a net basis by more than six billion. But what it has done is help stabilize the market." —(AFP)
© Agence France Presse 2000
© 2001 Mena Report (www.menareport.com)
