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Skip Navigation LinksHome :: Back Issues :: Rotten trees prop each other up

May 2001

Rotten trees prop each other up





Turkey has been suspended on the brink since February 22 when the government floated the lira and ended the 14-month stabilization programme supported by the IMF. The new programme has not been finalized and until it is Turkey will drift in semi-darkness.
The February crisis is unique in that it has hurt all segments of society - from the army to the well-heeled - and deprived the government of virtually all support. Even normally complacent organizations such as TUSIAD, the association of Turkish industrialists and businessmen, which is normally low key in its criticism of the government, and the chambers and bourses association of Turkey (TOBB) are clamouring for political reform. Turkey's allies and international banks have also raised their voices in its favour.
It seems to be universally understood that there can be no advance with the present political system, which is characterized by inefficiency and corruption.
Economic change cannot take place if it is not preceded by a political overhaul. However, Turkey is not fully democratic and change has never come from the bottom. There is no mechanism to effect change. Political leaders are chosen virtually for life. Prime minister Bulent Ecevit is so out of touch with realities that he has even refused to reshuffle his cabinet. Despite its unpopularity, the coalition will probably linger on unless there is a catastrophic economic reversal.
"They are like rotten trees that are staying up only because they have fallen on one another," says a western diplomat in Ankara.
The Turkish lira has lost 70% against the dollar since it floated and is yet to stabilize. Recession has ensued and unemployment is rising. The economy is also suffering from a reversal of capital inflows that started last October and a sharp contraction in foreign bank loans. Probably less than half of the $6 billion in syndicated bank loans maturing this year will be rolled over.
Banks took a massive hit on their currency positions with the currency collapse. Overall, banking activity is greatly diminished. Loans to households, which increased by a record 146% last year, are expected to contract by 18% in 2001. Consumer loans and credit card business, which was 20% to 30% of total banking activity before the crisis, dwindled to 5% to 10%, according to Burhan Karacam, chairman of Kocbank.
"Everything has slowed down to a tremendous extent," he says. "Uncertainty rules. Businessmen don't know what the exchange rate will become or at what point interest rates will stabilize. They don't know whether to produce and if so how much."
The paralysis is partly caused by uncertainty about the amount of offshore assistance Turkey will get from the IMF, World Bank and G7 countries. This will affect how much money the central bank prints, with resultant effects on inflation and interest rates.
Kocbank, which is owned by Turkey's largest private conglomerate, is in the same boat as its clients. It has decided to shelve its plans to buy a bank. "Our strategy about buying has not changed, but our timing has," says Karacam.
Goldman Sachs research says the fundamental situation remains unattractive owing to the difficulty of sticking to the reform agenda and because public sector debt/GDP ratios are likely to hit triple digits by the year end.
The economy crashed principally because the markets lost faith in the coalition's ability to make structural reforms and cope with a complicated situation. Ecevit appointed Kemal Dervis, an ex-director of the World Bank, to be super-minister of the economy.
Dervis, who has become enormously popular, although he has hardly done anything, is negotiating a new IMF agreement and has asked G7 countries for a bulk loan of $10 billion to $12 billion. But the lack of political will, which caused the crisis in the first place, is now preventing Turkey from getting out of it.
The IMF has told Turkey that it will not enter into a new deal unless the reform programme, which has been gathering dust since December 1999, is enacted. Anti-reform elements in the government are digging in their heels.
Turkey will test US president George W Bush's appetite for international bail-outs. Unlike Argentina and Indonesia, it has made a specific request for a bail-out beyond what the IMF and World Bank could provide under existing agreements. Dervis says without this recovery will be very difficult and hyper-inflation will be hard to avoid.
Ironically, the biggest obstacle to the bailout is the Turkish government itself. Political parties subsist on corruption and nepotism.
According to an as-yet-unpublished World Bank report made available to Euromoney, procurement of goods, works and services for the public sector represents 16% to 18% of GDP, or $32 billion to $36 billion according to pre-devaluation figures. Experts calculate that at least 20% of this (between 3% and 4% of GDP) ends up in the pockets of politicians and their supporters.
An observer who does not want to be named notes: "Friends and relatives of politicians have an uncanny knack of becoming suddenly and fabulously wealthy when the politician concerned enters government. [But] prosecutions for corruption are rare and convictions even rarer."
Saadettin Tantan, the popular interior minister, is conducting Turkey's first ever anti-corruption campaign. But his fervour is not shared by all his cabinet colleagues and he has yet to obtain convictions.
The reform programme aims to erect a firewall between politicians and state coffers. By enacting the reforms the political parties will in a sense be signing their own death warrants. On the other hand, reforms, especially public expenditure cuts, must be in place in order to enable the IMF to start making disbursements in May.
"The main thing is not money but political will," says Karacam. "The country is flush with dollars. I bet there is between $10 billion and $15 billion in the hands of banks, companies and consumers which is not entering the system because there is no confidence."






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