Introduction
In the last twenty years, the Turkish economy has undergone two major crises. The first crisis began at the early 90’s while the second began at the beginning of the 21st century. During this time, the Turkish government was in the middle of a stabilization program in its exchange rate. Although the government managed to calm market tensions through numerous assurances, things soon got out of hand.
Towards the end of 2000, the country’s interest rates quadrupled within a period of one month. This also marked a five times increase over the rate of depreciation that the government had predicted for a two year period. At the beginning of 2001, rates had jumped to an all time level of close to 6000%. This led to the collapse of the exchange rate and the beginning of the country’s second economic crisis. Some things stand out as having caused the economic crisis.
One thing that comes out as having contributed to the 2000-2001 economic crises in Turkey was the poor macroeconomic performance of the country. During the period, the country’s public sector was relying highly on borrowing and the sovereign debt to GNP was on the rise. The rising public debt and the appreciation of the lira were becoming a cause of concern for investors.
This was worsened by the external interferences caused by the rise in oil prices at the time and the rising of the U.S. dollar against the other currencies. To compound this situation, the country lacked a flexible banking system, something that made the lira unable to deal with the crisis.
During the preceding years, the banking sector was in a risk itself. Almost all the major banks had a load of non-performing loans and had an increased currency and maturity imbalances. This made the banking system unable to deal with any capital reversal. These weaknesses in the banking sector had a big contribution to the economic crisis experienced during the time. (Ozatay 3)
On top of the problems at the country’s banking system, the other problems that caused the economic crises were political and policy uncertainties. In 2001, the country was hit by two negative occurrences in the political sphere. These started after the Prime Minister was suddenly taken ill sparking a spate of rumors about his health. This led to instability in the political sphere since there was a possibility that his party, which was the largest partner in the coalition government would dissolve.
On top of this, the coalition parties were unable to agree on the necessary steps to be followed in talks that were ongoing for the country to be admitted into the European Union. The ensuing political indecision gave rise to an atmosphere of policy indecision. This political and policy uncertainties in the country played a major part in the economic crises that hit the country. (Ozkan)
Conclusion
The 2000-2001 economic crises in Turkey were the worst in the country’s history. During the period, the country’s rate stood at an all time high of 6200%. This major cause of this crisis was the lack of reforms in the banking system. This gave rise to a load of non-performing loans and maturity imbalances that made the banking system unable to deal with any capital reversal.
During the time, the coalition government was also having a hard time in trying to agree on key issue in the government. This affected the country’s policymaking organs hence leading to lack of key reforms that could have prevented the crises.
Works Cited
Ozatay, Fatih. Turkey’s 2000-2001 Financial Crises and the Central Bank’s Policy in the Aftermath of Crisis, n.d. 1-8. Print.
Ozkan, Gulcin. Currency and Financial Crises in Turkey, 2000-2001: Bad Fundamentals or Bad Luck? The World Economy, 2005. 541-572. Print.