IMF Programmes with Turkey have Changed Over Time
A letter to the Editor
By Michael Deppler
Director, European I Department
International Monetary Fund
July 20, 2001
Sir, Professor Oktay Yenal ("The irresponsible monetary fund", July 12) questions the analytics behind International Monetary Fund-supported programmes with Turkey. The analytics changed over time with Turkey's changing problems and the associated choices of the exchange rate regime.
In 1994-95, the problem was inflow of hot money, "a problem to which the IMF offered no solution" according to Prof Yenal. That crisis led to an undervalued exchange rate and the programme specified a floor to prevent undue depreciation of the currency. The answer to the excess inflow was to let the exchange rate appreciate. The authorities resisted.
In 1999-2000, the challenge was to achieve domestic debt sustainability and disinflation against the background of an external current account surplus. The answer was a crawling peg exchange rate regime and strict limits on the creation of central bank credit. The approach was traditional, widely supported at the time and initially successful. It did not fail because of cavalier design. Failure was due to a combination of bad luck (rising oil prices and a general shift away from emerging market debt) and the authorities' failure to deal in a timely way with emerging problems (an aggregate demand boom and an irresponsible banking system). That said, the programme design was, with hindsight, probably too brittle for Turkish conditions. It was the one, however, that, if successful, would have allowed a faster exit from the deep recession into which Turkey had fallen because of high real interest rates.
The 2001 programme features a floating exchange rate and focuses on disinflation and tackling an even worse domestic debt problem. Because of the latter, the international community has generously agreed, in effect, to take on a significant part of Turkey's increased domestic debt. That relieves the pressure on domestic interest rates and helps undergird debt sustainability. Because the central bank is the intermediary, this does show up as increases in credit, as Prof Yenal notes.
However, the design of the programme ensures that there are compensating declines in reserves (previously bolstered by IMF support), which means there is no net change in the money supply, which is what ultimately matters, especially in a float.
The programmes agreed with the authorities have been strong ones and international support has been correspondingly fulsome, with the IMF having after last week disbursed more than Dollars 10bn of the Dollars 19bn that have been committed. But no matter how sound the analysis or how strong the policy undertakings or how large the international support, there is a need for the authorities to convince markets of their continuing commitment.