We Need No Dime from the IMF: Is This a Temporary Illusion or Can the Turkish Economy Recover from the Current Recession without the IMF Loans?

Abstract

IMF praised the Turkish financial system for escaping the 2008 global financial crisis with a minor dent in its economy, the success was attributable to significant capital buffers built up in the aftermath of the 2001 economic crisis, more effective fiscal and monetary management, strengthened banking regulation and supervision, and commitment to fiscal rules. Turkey’s strengthened banking system is capable of absorbing endogenous and exogenous shocks under highly adverse market conditions. Thanks to the relentless work by the Banking Regulation and Supervision Agency of Turkey (BRSA, or BDDK in Turkish), prolonged political stability (one-party government since 2002) coupled with much improved global investor confidence have enabled Turkey to become one of the G-20 nations. The gradually improving positive image of Turkey has changed with President (then Prime Minister) Recep Tayip Erdogan’s remarks of “No IMF in Turkey’s future”, Erdogan has also said that the “IMF chapter will not be reopened”. Connected or a mere coincidence, Turkey’s protracted (i.e. over half a century) bid for its accession to the EU was blocked by Cyprus in December 2009. Since the repeated speculative attacks on Turkish lira in August 2018, lira’s value against the dollar has plummeted (lira has depreciated more than 80% of its value in a matter of a month) and the country’s foreign reserves have shrunk noticeably; consequently, the Turkish economy has debilitated and found itself in an inevitable financial emergency. Although Turkey had made the last remaining payment from its 19th standby agreement to the IMF in May 2008, at the backdrop of Turkey’s fractured economy, Turkey’s divorce from the IMF can hardly qualify as a true graduation since the country is on the brink of an economic crisis, attributable to excessive private and household debt, a failed coup attempt on July 15, 2016 by a fraction of the Turkish army, massive dollarization (close to $200 billion), fast rising unemployment (over 14%), continued speculative attacks on lira, and a cascade of corporate defaults. Since the IMF bailout package is out of possibilities, the Turkish financial authorities must find fresh capital immediately to avoid its highly fragile economy being pushed into an economic slump.