A Delicate Moment in Turkey’s Economic Transition: Can Turkey Survive Mounting Economic Problems without the IMF’s Bailout Package?

Abstract

By the mid-19th century, after nearly 600 years of power, the Ottoman Empire’s financial strength weakened considerably exposing the Empire to the risk of losing its territories in the Balkans, Middle East, and Africa. The Ottoman Empire’s involvement in the costly Crimean War (1853-56) was a fatal mistake which marked the beginning of the Empire’s everlasting addiction to foreign borrowing. The creation of the Ottoman Public Debt Administration by Sultan Abdulhamid II in 1881 (similar to the IMF) turned the Ottoman Empire into Britain’s semi-colony and was labeled as ill-man. Mustafa Kemal – a brilliant man, military commander, politician, strategist, and genius – had initiated the Turkish national resistance movement in the aftermath of World War I to expel occupying armies. Eventually, Mustafa Kemal created an independent Turkish Republic in November 1922 from the ashes of an Empire that existed 623 years. But not without cost, the Paris Conference of 1925 forced Turkey as the new Republic to agree to pay the debt of the Ottoman Empire (last remaining payment was made in 1954). Now the question is to be with the IMF or not to be. Following the Justice and Development Party’s win in the 2007 general elections (47% of parliamentary seats), Prime Minister Recep Tayip Erdogan said “No IMF in Turkey’s future”. Although Turkey made its final loan payment to the IMF in May 2008, many contend that Turkey’s divorce from the IMF can hardly qualify as a true graduation since the country is on the brink of an economic crisis (financial meltdown), attributable to excessive private and household debt, massive dollarization, a failed coup attempt by a fraction of the Turkish military (July 15, 2016), fast rising unemployment (over 14%), fast devaluation of lira due to repeated speculative attacks and the subsequent cascade of corporate defaults. At the backdrop of multifaceted instability, Turkey’s current gloomy financial situation (high inflation and chronic deficits of current account, budget, and trade) is in desperate need of foreign capital inflows especially when Turkey’s options to finance deficits through external barrowing have become substantially limited. Elongated addictions, whether to the U.S. dollar or to the IMF, are not easy to overcome by a politically oriented decision provided that Turkey has been the IMF’s longest devoted member (since 1947). Turkey is going through very tough times; with low foreign reserves, Turkish economy has become vulnerable to speculative attacks stemming from domestic and external sources.