Turkey in crisis talks with IMF

Turks face more inflation as the lira tumbles

The Turkish lira has continued its slide on the currency markets, while the government was looking for ways to control the crisis.

The lira has now plunged more than 36% since the Turkish government suspended the currency regime pegging the currency to the US dollar on Thursday morning. One dollar now buys more than one million lira.

Until a comprehensive new stabilisation program is unveiled and supported by the IMF the [Turkish] central bank will not have a credible monetary policy

Standard & Poor's

Finance Minister Sumer Oral met officials from the International Monetary Fund (IMF) to revise the economic stabilisation program agreed with the fund. The IMF has promised to support economic reforms in the country with a $11bn loan.

US President George Bush, meanwhile, called the Turkish Prime Minister Bulent Ecevit to "express support for Turkey, a close friend". The White House described the call as "warm, reflecting the strong ties between the two governments".

Credit rating blow

During the day came a further blow to the government, when the credit ratings agency Standard & Poor's lowered Turkey's credit worthiness. This will make it more expensive for the government to secure foreign loans.

"Until a comprehensive new stabilisation program is unveiled and supported by the IMF the [Turkish] central bank will not have a credible monetary policy," the agency said.

Turkish consumers and importers, meanwhile, are bracing themselves for sharp price increases, following the devaluation of the Turkish lira.

The Turkish problems are in fact more political than economic

Professor Faruk Selcuk of Bilkent University

Investors had begun moving out of the lira following a political row between President Ahmet Necdet Sezer and Prime Minister Bulent Ecevit, over the government's record in tackling corruption.

Panicked investors drained over $7bn from central bank reserves on Monday alone.

Revised inflation targets

Following the meeting with the IMF, Turkey's junior Trade Minister Tunca Toskay told the local Anatolia news agency that the inflation target of 12% for 2001 would need to be altered.

This is the first time the government has announced a specific economic adjustment since the devaluation of the lira on Thursday.

Mr Toskay said the new target figure would not be available for a few days. Inflation last year was at 39%, well above the target of 25%, but down from 70% in 1999.

Speaking on the sidelines of a Balkans summit in Macedonia, Prime Minister Bulent Ecevit said his government had the "full backing of the IMF".

Consumer, business impact

Many consumers will soon find that they can afford only three-quarters of the goods that they could buy before Thursday.

Turkish exporters, though, can expect a boost to business. Their products have suddenly become much cheaper and thus more competitive on world markets.

Short sharp shock

Earlier in the week, the Turkish authorities had spent millions of dollars to prop up the lira.

But on Thursday morning, they finally threw in the towel and decided to let the lira float freely on the markets. Within hours, the currency lost as much as 37% of its value, but by the end of Thursday it had recovered about a quarter of its losses, ending the day with a loss of 28%.

Ecevit: Committed to fighting inflation

The government plans to bring it down to single digits by the end of 2002 are regarded as crucial to the country's hopes of moving forward its application to join the European Union.

Speaking after the decision to remove the currency controls, Prime Minister Ecevit said he was committed to continuing the country's reforms and still viewed fighting inflation as a priority.

He added the government would wait for the lira exchange rate to settle before taking necessary action.

Cornerstone

The floating of the lira undermines a cornerstone of the government's three-year anti-inflation programme, backed by $11bn from the International Monetary Fund (IMF).

The IMF's Horst Köhler to revise Turkey's economic programme

Despite this, IMF managing director Horst Köhler said the organisation supported the Turkish Government's move, adding that it "should help stabilise the exchange rate and ensure - possibly after an initial increase - that the inflation rate continues to decline".

But he also said the "macroeconomic framework for the economic program" would have to be revised.