The Economic and Financial Stability in Turkey:

A Historical Perspective
Yksel Grmez, Central Bank of Turkey
Serkan Yiit, Central Bank of Turkey
Abstract: Since gaining independence in 1923 until the 2000s when the Republic of Turkey applied
for membership in the European nion! "olatile trends were recorded in the country in terms of both
economic growth and financial performance# $n the early stages! lack of human capital and hard
currency reser"es pre"ented rapid economic growth and creation of welfare# The priority was gi"en to
institutional reforms in order to achie"e sustainable growth under low inflation and financial stability#
%eightened political unrest in Europe leading to &&$$ forced the 'oung Republic to rely on a
(mi)ed* system of etatism for sustainable growth and financial stability# +ri"ate ownership and greater
participation of pri"ate capital in economic acti"ity were gi"en additional incenti"es during the 19,0s!
whereas an import-substitution growth strategy was initiated .uite successfully during the 19/0s when
the Turkish economy e)perienced the best growth performance during 00 years of its e)istence# The oil
crisis of the 1910s took away all the resources and pre"ented the emergence of strong pri"ate banks#
The accumulated capital was wiped out by the balance of payment crises# The second half of the 1900s
was the period when pri"ate banks began winning a market share# The 1990s! which may best be
described as the (lost decade* in terms of banking and financial stability! ended with a huge financial
crisis in 2001# 2fter 2002! Turkish economy managed to achie"e a "ery high le"el of growth that came
with low and decreasing rate of inflation# The Republic of Turkey is now facing the challenging task of
increasing domestic sa"ings to support sustainable growth under low and stable inflation and managing
its way through the complications of global financial crises that still clouds the air and threatens the
economic and financial stability all around the world#
Keywords3 4anking! financial stability! economic growth#
JE !ode: 51! 521! 67
Acknowledgments 2cknowledgments are due to all South-East Europe 8onetary %istory 9etwork
members for encouraging us to prepare this paper#
The Economic and Financial Stability in Turkey: A Historical Perspective
1 Fourth Conference of Southeast Europe onetary History !et"ork #SEEH!$
"# $ntroduction
Economic and financial stability has always attracted strong interest from academicians and
practitioners# Economic stability may best be defined as an economic en"ironment without e)cessi"e
fluctuations or e)treme "olatility in the macro-economic "ariables# &hen the economy grows at a fair
rate under low and stable inflation! it is considered to be economically stable# 6n the other hand!
"olatile recessions! business cycles in "ery short hori:ons! unsustainable balance of payment
aggregates! high foreign e)change "olatility! sharp ups and downs in fiscal balances! persistently high
or "olatile inflation leading to financial stability concerns are all signs of economic instability! which
may increase uncertainty and discourage in"estment! slow down economic growth and decrease social
welfare# &hen economic instability is minimised! the economic system can increase the .uality of life
by promoting li"ing standards through heightened producti"ity and efficiency that will lead to
sustainable employment le"els#
The definition of financial stability is a comple) matter and different approaches were taken by
different authors in an attempt to find the most ade.uate definition# 6n the final analysis! it can be
portrayed as a con;uncture where the financial system efficiently performs its key economic functions
in terms of efficient allocation of resources! spreading risk as well as settling payments under all type
of stress situations including structural changes and paradigm shifts <4undesbank! 2003= +adoa-
Schioppa! 2003= &ellink! 2002= Schinasi! 2007># $n other words! financial stability may best be
described as the ;oint stability of the key financial institutions operating within financial markets and
the stability of these markets! where economic entities can feel secure that their financial transactions
will be e)ecuted timely and securely <Schinasi! 2003>#
The financial instability is also a situation in which economic performance is potentially impaired
by fluctuations in the price of financial assets or by an inability of financial institutions to meet their
contractual obligations <?rockett! 1991= ?hant et al! 2003># Similarly! 8ishkin <1999> defines financial
instability as the occurrence of shocks to the financial system! which interfere with the information
flow! disabling the financial system from performing its ;ob of channelling funds to those with
producti"e in"estment opportunities# $n addition! financial instability can also be characteri:ed by
significant de"iation <either below or abo"e> in aggregate spending which is also likely to harm the
economy@s potential to produce <Aerguson! 2002># Thus! financial instability is caused by financial
imbalances that put great risks on the intermediaries@ balance sheets to the e)tent that the financial
system can no longer allocate funds efficiently <8oen;ak et al! 2007># Ainancial instability is therefore
a se.uence of e"ents entailing heightened risk of financial crisis! where financial crisis is seen! in turn!
as a ma;or and contagious collapse of the financial system! entailing inability to pro"ide payment
ser"ices or to allocate funds for in"estment <Ba"is! 1999># $n this paper! we prefer these definitions of
economic and financial stability and the terms will be used in this conte)t from now#
Throughout the history! different countries! from the Romans to the 2mericans! captured high
growth rates with strong social welfare creation# 6ttoman Empire was one of those successful
economic models that created strong economic growth ending in long-lasting sustainable welfare
creation that lasted for more than ,00 years# ?ommon characteristics of these models may be counted
% Fourth Conference of Southeast Europe onetary History !et"ork #SEEH!$
The Economic and Financial Stability in Turkey: A Historical Perspective
as the rule of law including property rights! a strong feeling of ;ustice and e.ual treatment of citi:ens!
efficient resource allocation! incenti"es for technological inno"ation! an open mind for reforms when
change is needed and a fle)ible approach to re-organisation and re-structuring to adapt to fast changing
global conditions# The fall of the 6ttoman Empire was caused by the loss of these prere.uisites for
sustainable de"elopment which enhance economic stability#
$n the early years of the 'oung Turkish Republic! there were indeed no economic or financial
stability concerns# The priority in the early years was hunger pre"ention in order to keep the social law
and order after many years of global and national conflicts that destroyed the ma;ority of human
capital# The already scarce resources to finance a new de"elopment initiati"e were wiped out by the
lack of social rule of law# 2fter all! the main heritage of the Empire! one of the main losers of the Airst
&orld &ar! was a huge e)ternal debt#
The Turkish Republic was struggling for sur"i"al in the early years# 2ppro)imately 11C of the
population! which is about 13 million! li"ed in "illages in the 1920@s# 02C of the working population
was engaged in agriculture! /C in industry! ,C in trade and 1C in the ser"ice sector# $ndustryDs share
in the national income was only 10C! and the share of agriculture was /1C# %owe"er! agricultural
production was "ery primiti"e and in"ol"ed "ery few technological inno"ations# $n the RepublicDs early
year! there were only around 220 tractors in the country# $ndustry met only the most basic needs of the
population that was e)periencing e)treme shortage of basic foodstuffs#
$t was not only the lack of resources on the national le"el that created hurdles for economic welfare
creation for Turkey in those early years3 5lobal conditions did not help either# The 1929 economic
collapse in the S increased the cost of e)ternal funding as well! and once that turmoil ended! came the
heightened social unrest in Europe leading to the &orld &ar $$# 9ational and global conditions did not
allow ;ump-starting a proper economic and financial stability progress in the early decades#
6ne may argue that the 19,0s were the first decade in which Turkey had a proper chance of
welfare creation# nfortunately! a military coup disrupted the strong economic reco"ery for a short
period of time# Buring the planned economy of the 19/0s a certain amount of capital was accumulated
to trigger a long-lasting economic and financial stability# %owe"er! the first and second oil price shocks
of the 1910s once again increased dependence on e)ternal funding for sustainable growth#
The 1900 reforms to downgrade the import-substitution based de"elopment strategy in order to
upgrade an e)port-led growth helped to catch a high growth platform for a couple of years but such a
high le"el of re-structuring had its own drawbacks and financial liberalisation policies created a
banking crisis in 1903# %owe"er! the reco"ery was fast and Turkey e)perienced strong growth plato for
another decade# Ainancial liberalisation also brought new diseases to potential growth! such as
dolarisation# $nternational financial institutions! such as the $nternational 8onetary Aund <$8A>! were
familiar "isitors in those years but this did not pre"ent another hea"y banking crisis in 1997# The 1990s
are generally been accepted as lost years not only because of the 1990 earth.uake but also because of
the global financial spill o"er! such as the Russian and the Aar-East crises# The decade ended with a
deep economic crisis in 2001 and the Turkish Economy has been undergoing in-debth re-structuring
and reforms e"er since#
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) Fourth Conference of Southeast Europe onetary History !et"ork #SEEH!$
The Economic and Financial Stability in Turkey: A Historical Perspective
The o"erall economic growth performance of Turkey since 1923 is shown in the chart below# %igh
"olatility in the early years reflects the dominance of agriculture and the impact of good and bad
weather conditions# 2"erage growth rate during the period was ,#12 percent#
Chart 1
1
GNP Growth
#Percenta.e$
)%
%(
%'
%+
1*
1%
(
'
+
/'
/(
/1%
/1*
0!P 0ro"th 1ate #at constant prices$ Avera.e
Source: Turkstat2
The rest of the paper is structured as follows3 The early years of the 'oung Republic from an
economic and financial stability point of "iew will be summarised in the ne)t section# The early
liberalisation period from 197, to 19/0 will be followed by a summary of the planned economy of the
19/0s# Then we will e)plore the second initiati"e for liberalisation in the 1900s! which will be followed
by the lost years of the 1990s# The paper will conclude with the re-structuring and reforms periods of
the final decade after the destructi"e economic crisis of 2001#
%# $nstitutional in&rastructure period '"(%)*"(+,-
$t may be argued that the ma;or impact of the collapse of the 6ttoman Empire on the 'oung
Turkish Republic was a huge debt burden# 2lmost the final ,0 years of the Empire were lost through
wars that ended with border losses and de"astating destruction of an already scarce infrastructure# The
e)tremely costly defence of Bardanelles in Eanakkale and the Airst &orld &ar destroyed the human
capital and an additional burden of domestic conflicts increased this destruction in the years that
followed# ?ompared to neighbouring countries! 8inor 2sia infrastructure was insufficient and under-
de"eloped# $t lacked the basic infrastructure for railways! roads! schools! while basic health ser"ices
1
9ew series 5B+ data were used after year 1999#
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were ade.uate# The industry or manufacturing was a fantasy word as the share of agriculture in the
national economy was dominant! and as the ne)t chart e)hibits! there were sharp fluctuations in growth
rates determined by weather conditions3
Chart %
%'
GNP Growth Rate
#Percenta.e$
%+
1*
1%
(
'
+
/'
/(
/1%
/1*
0!P 0ro"th 1ate #at constant prices$ Avera.e
Source: Turkstat2
ntil 193/! economic growth rate fluctuated sharply! falling by more than 10 percent in some
years and growing by more than 1, percent in others# 2lthough Turkey did not enter the Second &orld
&ar! the state defence costs increased fast and these e)penses negati"ely affected economic
de"elopment efforts and lowered the a"erage growth rate# Buring the war years between 1970 and
197,! 59+ growth was negati"e e)cept in 1972# $nflation was under control and the "alue of TR'
against the #S# dollar followed a steady course especially after the year 1937#
Table 1
Selected Economic Indicators
CP3
Trade 4omestic 4ebt E5chan.e
Hi.hest
) months
Short Term
E5port 3mport 6ud.et
3nflation
6alance #illion 7S 1ate
3nterest 1ate
6ank #illion #illion 4eficit 8
)
#9$
1:'
#illion 7S 4ollar: ;ear #T<87S
#9:;ear
4eposit 7S 7S 0!P
4ollar$
1
End$
):,
4ollar$
1
1ates
1
4ollar$
):1
4ollar$
):1
#9$
End$
1
1&%) /)* 12*- ,1 (- /+2*
1&%' 1*2' /1( 12&) (% 1++ /+2*
1&%, -2& /%* 12(- 1+) 1%& %2+
1&%* 12- /%, 12&) &* 1%1 /+2,
1&%- /1%2% /%- 12&* (1 1+( /+2%
1&%( /+2' /%, 12&- (( 11' /12)
1&%& *2) /'& %2+- -, 1%' /+:,
1&)+ /-2( % %21% -1 -+ /+2,
1&)1 /,2, + %211 *+ *+ 12%
1&)% /%2, - %211 -2++ '( '1 %2%
1&)) /1+2- 1) 11-2+ 12** ,2,+ ,( ', +2+
1&)' /12* ' 1*,2' 12%* ,2,+ ,2++ -) *& 12(
1&), /-21 * 1&+2, 12%* ,2,+ ,2++ -* -1 %2%
1&)* +2' %+ 1&(2' 12%, ,2,+ '2,+ &' -' /121
1&)- 12, 1& %)(21 12%* ,2,+ '2,+ 1+& &1 /12,
1&)( /+2' /' %-)2' 12%* '2++ '2,+ 11, 11& /12+
1&)& %2% - %(&2& 12%( '2++ '2,+ 1++ &) /+21
1&'+ (2' )1 )-(2( 12)( '2++ '2++ (1 ,+ /+2*
1&'1 1&2* )* ,',2, 12), '2++ '2++ &1 ,, /%2,
1&'% **2( 1) -)%2( 12)1 '2++ '2++ 1%* 11) /12,
1&') ',2- '1 -(*2) 12)1 '2++ '2++ 1&- 1,, /+21
1&'' %2, ,% (%'2' 12)1 '2++ '2++ 1-& 1%- +2&
1&', +2& -1 ()&2- 12)+ '2++ '2++ 1*( &- /121
Avera.e *2+ , '%&2+ 12*1 '2-, '2)) &*2* &12& /+21)
Source: 1/The Central 6ank of Turkey=
%/Turkstat=
)/ Pakdemirli E2: 1&&1 >Ekonomimi?in 1&%)@den 1&&+@a SayAsal 0BrCnCmC@=
'/ 4oDruel F2: >TCrkiye@de Enflasyonun Tarihi@=
,/ 7ndersecretariat of Treasury of Turkey2
2fter 1930! the countryDs foreign trade was in surplus# Especially in the first half of 1970s! trade
balance surpluses dominated the e)ternal trade indicatiors# ?onsumer +rice $nflation <?+$> was F12#2
percent in 1921 and //#0 percent in 1972# 4ecause of the nature of the preferred regime! e)change rates
were relati"ely stable#
Arom 1923 to 197,! financial stability was ne"er disrupted thanks to rational policies to manage
hightenned stress# Airst of all! the ?entral 4ank of the 6ttoman Empire was gi"en an e)tended license
to sustain monetary stability# This has pre"ented a total collapse of monetary "alues and created certain
barriers to a possible de"astation of the already scarce wealth# 4anking! money or capital markets were
all underde"eloped but there were some incenti"es to shape up the national banking system despite
enormous challenges# There was a non-monetary base in trade and transactions! implying e)istence of
barter economy# State support and the countryDs economic conditions led to the establishment of a
monopolistic banking3 2s an almost closed economy without national central bank in an en"ironment
in which credit was channelled mainly by foreign banks and credit powers o"er a long period! there
was no chance for pri"ate banks to emerge <5Grme:! 2000>#
The primiti"e agricultural production base and underde"eloped market structure pre"ailed in an
underde"eloped socio-economic framework# There was only one state bank! 17 foreign banks and 0
domestic banks in Turkey in 1923# $n si) years! 27 pri"ately owned domestic banks ;oined the financial
system by 1929
2
# Escaping from the financial crises while still learning banking in the early years! and
e"en resisting the effect of the nited State@s 5reat Bepression of 1929 with almost perfect fiscal
discipline! enabled the emergence of a mi)ed pri"ate-public banking system that eased the burden of a
financial re-de"elopment and re-structuring# 4etween 1923 and 1932! more than 20 local banks were
gone bust mostly because of the 5reat Bepression <5Grme:! 2000>#
2 ma;or de"elopment for the financial system of the country was the establishment of the ?entral
4ank of Turkey in 1932 # &ith the emergence of pri"ate banks which followed the creation of the
central bank! basic financial architecture was almost complete# %owe"er! as a damage control strategy!
the main efforts between 1939 and 197, were focussed on keeping the impact of &orld &ar $$ as low
as possible# $t may be suggested that in "iew of the global economic and financial conditions! the
approach to economic and financial stability applied in this period! should be considered successful# $t
was constructi"e to stay away from the war and rationally use scarce resources! and at the same time!
accumulate some capital rather than spend it all on the defence# Turkey was kept in the right
positioning for the re-structuring and re-de"elopment strategies of the post-war economic policies#
)# .ovin/ towards an open economy '"(+0*"(,(-
The preference of a common public and pri"ate ownership model of de"elopment in the early
period was not a choice of good will but a forced alternati"e since! lacking capital accumulation! there
was no pri"ate wealth creation potential# 2s soon as the destructi"e impact of the Second &orld &ar
ended in mid 1970s! strong subsidies were allocated to support the ;oint ownership model of public and
pri"ate enterprises# %ea"y state in"ol"ement in economic acti"ity was rela)ed and pri"ate
entrepreneurs were gi"en incenti"es to apply aggressi"e in"estment strategies# 2s the ne)t chart shows!
a"erage growth rate during the period came as high as 0!3, percent thanks to the e)treme performance
in 197/#
2
Silier 6# 191,! 1920@lerde THrkiye@de 8illi 4ankacIlIJIn 5enel 5GrHnHmH! THrkiye Kktisat Tarihi Semineri!
%acettepe#
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Chart )
GNP Growth Rate
#Percenta.e$
)%
%(
%'
%+
1*
1%
(
'
+
/'
/(
0!P 0ro"th 1ate #at constant prices$ Avera.e
Source: Turkstat2
Buring the period obser"ed! ?+$ was moderate and fluctuated from F/#/ percent to 1#1 percent
until 19,,! but the second half of the 19,0s had a bad track record in this respect# Buring that period
there was no pressure or no crowding out of the pri"ate by the public sector through unsustainable
budget deficits# E)change rate regime fa"oured the fi)ed rates rather than a competiti"e de"aluation in
the second half of the 1970s before ;oining the 4retton-&oods# $n search for a realistic currency "alue!
the TR' was de"aluated against the #S# dollar by ,0C on 1 September 197/# 6ne of the weaknesses
of such an arrangement appeared as a chronic current account deficit! especially during the second half
of the 19,0s#
Table %
Selected Economic Indicators
CP3
3nflation
#9$
1:%
4omestic 4ebt
#illion 7S 4ollar:
;ear End$
):,
6ud.et
4eficit 8
0!P
)
E5chan.e
1ate #T<87S
4ollar$
1
Hi.hest Short
Term 3nterest
1ate #9:;ear
End$
1
Current
Account
6alance #illion
7S 4ollar$
)
1&'* '2) *+-2- /+2) 12(1 '2++ -
1&'- /*2* ),'2* /+2- %2(% '2++ /1'
1&'( ,2' ,*&2' /+2- %2(1 '2++ /1'&
1&'& *2' '&*2, /+2* %2(% '2++ /&)
1&,+ /)21 *'%2& +:, %2(+ '2++ /,+
1&,1 %2, -1'2) /+:, %2(+ )2++ /&'
1&,% '2, -,+2+ +:1 %2(+ )2++ /1&(
1&,) %2& (%12' +:1 %2(+ )2++ /1*'
1&,' -2- (,-21 121 %2(+ )2++ /1--
1&,, 1(2* &%(2* +:( %2(+ '2,+ /1--
1&,* %2- &*'2) +2( %2(+ '2,+ /-,
1&,- 1)2, 11'%2& +:- %2(+ '2,+ /*'
1&,( %+2, 1%(,2- +:' %2(+ '2,+ /*'
1&,& %(2, 1%(,2- +2( %2(+ '2,+ /1',
Avera.e -2- ()12( +:% %2-) )2(& /1+'21
Source: 1/The Central 6ank of Turkey=
%/Turkstat=
)/ Pakdemirli E2: 1&&1 >Ekonomimi?in 1&%)@den 1&&+@a SayAsal 0BrCnCmC@=
'/ 4oDruel F2: >TCrkiye@de Enflasyonun Tarihi@=
,/ 7ndersecretariat of Treasury of Turkey2
6n the road to a small open economy! financial stability in Turkey in the second half of the 19,0s
did not ha"e a bad track record# +ri"ate banking had a licence to e)pand fast when public banks ga"e
some space to them# The then decision makers fa"oured liberalisation and market economy principles!
and de"elopment :ones reached inner 2natolia with increasing in"estment in infrastructure# 8iddle and
upper classes took a breath and pri"ate wealth accumulation rate reached the highest le"els# E"en under
controlled deposit and credit interest rates! number of pri"ate banks increased sharply# 2nother
characteristic of this period was the enhancement of branch banking# There was a rapid increase in the
number of branches of banks between 197,-19/0 in Turkey# Thirty new banks were established
<including bank mergers> and the number of banks reached ,9 compared to 72 in 1977#
+# Planned economy and oil price shocks '"(01*"(21-
2fter trying a liberal approach to the de"elopment strategies in the 19,0s! the tactic was changed
in the 19/0s! and if the first half of the 19,0s may be called the first (golden years* of Turkey in terms
of growth! the second (golden years* were in the 19/0s#
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Chart '
GNP Growth Rate
#Percenta.e>
1'
1%
1+
(
*
'
%
+
/%
/'
0!P 0ro"th 1ate #at constant prices$ Avera.e
Source: Turkstat2
The de"elopment paradigm during this period was shifted in fa"our of import substitution based
growth# The framework was .uite transparent3 There was a , year plan prepared by wise guys in the
State +lanning 6rganisation and appro"ed by the elected decision makers3 The end result was a long
period of sustainable growth of around , percent# Buring this period! e)tremely detailed plans captured
e"ery le"el of priorities regarding the production and distribution channels in the economy# The role of
the public sector increased in the conduct of economic acti"ity#
Table )
Selected Economic Indicators
CP3
4
3nflation
omestic 4ebt
#illion 7S
6ud.et
E5chan.e Hi.hest Short
3nterest 1ate:
Current
4eficit 8
1ate Term 3nterest
Savin.
Account
#9$
1:' 4ollar: ;ear End$ ) #T<87S 1ate #9:;ear 1 6alance #illion
):, 0!P
4ollar$
1
End$
1 4eposits
7S 4ollar$
):1
1&*+ %2) ('&2( +2( ,211 '2, /1)&
1&*1 /+2- &((2& +2& &2+ -2, /1-+
1&*% %2* 1:1%%2% +2% &2+ -2, /%'%
1&*) )2% 1:%,,2* +2+ &2+ -2, /)++
1&*' 12- 1:)1121 +2& &2+ -2, /1+&
1&*, ,2& 1:)((2& 12% &2+ -2, /-(
1&** '2' 1:-**2- +2( &2+ -2, /1*'
1&*- *2- %:+%%2% +2+ &2+ -2, /11,
1&*( +2' %:%--2( +2* &2+ -2, /%%'
1&*& *2, %:,1121 12, &2+ -2, /%%+
1&-+ (21 %:1&,2( +2+ 112) &2+ &2+ /1-1
1&-1 1*2) 1:&*&2) %2& 1'2( &2+ &2+ /1+&
1&-% 1%2& %:),-21 +2+ 1'2+ &2+ &2+ /(
1&-) 1*2* %:-,+2+ +2& 1'2+ (2( -2+ '('
1&-' 1(2- ):1%&2, 12+ 1)2( &2+ &2+ /-1(
1&-, %+21 ':*1%2% +2) 1'2) &2+ &2+ /1:*'(
1&-* 1,2) *:11*2+ +2* 1,2& &2+ &2+ /%:+%&
1&-- %(2) -:,1,2' ,2+ 1-2( &2+ &2+ /):1'+
1&-( '&2* -:')*2* 12& %'2+ 1+2+ 1%2+ /1:%*,
1&-& ,*2, 11:+,12& )2+ )+2( 1+2( %+2+ /1:'1)
1&(+ 11*2* *:&,-2( )2* -,21 %*2+ ))2+ /):'+(
Avera.e 1(2- ):'+&2+ 12% 1,2( &21 1%2) /-%)2+
Source: 1/The Central 6ank of Turkey=
%/Turkstat=
)/ Pakdemirli E2: 1&&1 >Ekonomimi?in 1&%)@den 1&&+@a SayAsal 0BrCnCmC@=
'/ 4oDruel F2: >TCrkiye@de Enflasyonun Tarihi@=
,/ 7ndersecretariat of Treasury of Turkey2
$n the 19/0s! ?+$ was low and stable= there were no ma;or fiscal imbalances and the e)change rate
was rather stable# There were no balance of payment imbalances either# $t was almost a magical
economic performance and income distribution gained some breathing space allowing it to! at least
partially! repair the ine.ualities#
This picture changed rapidly in the 1910s and a hidden fragility of the 19/0s came to the scene3
Bependence on energy imports# 2s oil prices increased sharply! not only once but twice! the economy
failed to adapt to high-energy prices and the economic policy makers lost sight of the medium and long
run but rather concentrated on short-term solutions# Aoreign e)change rate guarantees increased
contingent liabilities of the public sector and ad"ances to the Treasury from the ?entral 4ank printing
machines created a persistently high and "olatile inflation# Buring this period! Turkey fell into a
double-digit inflation trap# $nstead of ha"ing a multi-party coalition implement medium and long-term
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economic and financial stability programs for a couple of years! domestic conflicts among social
groups increased the cost of solutions to the crises and Turkey ended 1900s with an inflation rate of
abo"e 100 percent# Ai)ed e)change rate regime became unsustainable because of the black market
rates! while public sector borrowing re.uirements increased to such high le"els that crowding out
became a norm in the years that followed# E)ternal account imbalances only created additional
problems and did nothing to help decrease the pressure#
2s e)pected! there were no catastrophic problems on the financial stability front# The reason was
being the lack of market influence on deposit and credit interest rates in addition to negati"e interest
rates imposed on the banking system by the regulators# ?entral bank independence was a far away
dream and nobody talked about it when the economic acti"ity collapsed so badly due to a shortage of
raw materials for the production of basic goods! including energy# 2d"ances to the Treasury were
regularly granted and public banks increased their dominance in the financial sector because of the
critical importance of credit to the pri"ate sector#
Ainancial stability during this period may also be e)plained by the lack of an in-depth financial
market or (bankisation*# Ainancial markets were .uite shallow# 4anks@ asset .uality! li.uidity and
profitability impro"ed steadily whereas capital ade.uacy deteriorated as shown in the chart below3
Chart ,
Financial Strength Sub-Indices
1)+
1%,
1%+
11,
11+
1+,
1++
1%,
1%+
11,
11+
1+,
1++
&,
&+
&, (,
&+
(+
Asset Euality
<iFuidity
1+,
1%+
1++
11+
1++
&,
&+
&+
(+
(,
-+
(+
*+
Profitability
Capital
Source The 6anks Association of Turkey2
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2s e)pected! early 19/0s e)perienced a sharp financial deepening when credit to 59+ ratios more
than doubled# Total assets to 59+ ratio also displayed a similar trend# %owe"er! as e)plained earlier!
oil price shocks discouraged this tendency and financial deepening eroded sharply so that the le"els
recorded at the end of period were almost identical to those at the beginning of the period# This period
was generally regarded as the root-cause of institutionalised short-sighted monetary and fiscal policy
implementation failures# 6ne may also argue that the 1910s were the maturing period of the lost
decades in Turkey in terms of economic and financial stability#
Chart *
Financial Deepening
'+ *+
,,
),
,+
)+
',
%,
'+
%+
),
1, )+
Credits 8 0!P Total Assets 8 0!P #1i.ht A5is$
Source: The 6anks@ Association of Turkey #6AT$
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,# .arketisation and liberalism '"(2"*"((1-
The first half of 1900s saw a surprise e)ternal debt crisis of the Latin 2merican countries! and with
the help of the 1900 reform agenda! Turkish economy managed to record a decent pace of growth3
Chart -
GDP Growth Rate
#Percenta.e$
1+
(
*
'
%
+
0!P 0ro"th 1ate #at constant prices$ Avera.e
Source:Turkstat2
The a"erage growth rate during the period was more than , percent! while the 1901 rate was close
to 10 percent# The 1900 stability program primarily aimed to change the course of import substitution
based de"elopment strategy in fa"our of an e)port-led growth# ?hronic hard currency shortages
surrounding the economy since 1912 were gi"en a structural response so that the economy could create
its own hard currency inflow through trade and ne"er face balance of payment bottlenecks again#
8arketisation was a critical part of this strategy and credit and deposit rate settlement was left to
market forces# 2t the same time! the ?entral 4ank was e.uipped with open market operations tools that
could be acti"ely used# 2 proper domestic borrowing mechanism was declared in addition to the
establishment of o"er-night money markets within the ?entral 4ank# This was followed by the
emergence of a foreign e)change market! gold market and a department in charge of acti"e reser"e
management# 2 stock e)change in $stanbul was also established at that time#
Table '
Selected Economic Indicators
CP3
3nflation
#9$
1:'
4omestic 4ebt
#illion 7S
4ollar: ;ear
End$
):,
PS61 8
04P
1
E5chan.e
1ate
#T<87S
4ollar$
1
Hi.hest Short
Term 3nterest
1ate #9:;ear
End$
1
3nterest
1ate:
Savin.
4eposits
1
Current
Account
6alance
#illion 7S
4ollar$
):1
1&(1 ),2& -:-1) )2++ 11+ )12, ),2+ /1:&1&
1&(% %-21 (:&1+ %2-+ 1*1 )12, ,+2+ /&),
1&() )+2& 1':%(( )2-+ %%' '(2, ',2+ /1:(%(
1&(' '(2, 11:,-, '2++ )*' ,%2+ ',2+ /1:')&
1&(, ,+2' 1):''( %2-+ ,%+ ,%2+ ,,2+ /1:+1)
1&(* )-2+ 1,:-1' %2-+ **& '(2+ '(2+ /1:'*,
1&(- )&2* %+:1%- '2,+ (,* ',2+ ,(2+ /(+*
1&(( -12- %+:+&' )2*+ 1:'%* ,'2+ ()2& 1:,&*
1&(& *)2- 1(:-,) '2++ %:1%1 ,'2+ ,(2( &)(
1&&+ *%2% %+:1+& ,2,+ %:*+* ',2+ ,&2' /%:*%,
Avera.e '*2- 1,:+-) )2*' &+* '*2% ,)2( /&,+
Source: 1/The Central 6ank of Turkey=
%/Turkstat=
)/ Pakdemirli E2: 1&&1 >Ekonomimi?in 1&%)@den 1&&+@a SayAsal 0BrCnCmC@=
'/ 4oDruel F2: >TCrkiye@de Enflasyonun Tarihi@=
,/ 7ndersecretariat of Treasury of Turkey2
The main problem that was addressed properly during this period was inflation# 2lthough it
declined to 21 percent in 1902! inflation remained persistent and ne"er fell back to single digits for
another two decades# 2t the same time! chronic public deficits crowded out the pri"ate sector in almost
e"ery year and the burden increased annually# 4alance of payment imbalances only increased the
problems of the fragile economic stability#
6n the financial stability front! the first shock were bank bankruptcies of the early 1900s#
6b"iously! those bankers constructed indi"idual pon:i games# The banks that collapsed were forced to
merge with public banks! which was the early misuse of public banks# that in the decades that followed#
The reform agenda of the 1900 failed to achie"e a high le"el of regulatory and super"isory .uality!
while la) approach to market economy led to the accumulation of certain pressures that were carried
o"er into the following decades# 8anaging the change was a difficult task and financial market
infrastructure needed a better o"ersight! which the Turkish economy learned later on at a hea"y price#
nder high and "olatile inflation! performance of the banking sector was not terribly bad! but the banks
were not gaining regular power either# Shortening of deposit terms and increased pressure of
dollarisation added e)tra pressure on the banks# $n mid-1900s! banks were allowed to collect foreign
e)change deposits and dollarisation was institutionalised#
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Chart (
Financial Strength Sub-Indices
1)+
1%,
1%+
11,
11+
1+,
1++
Asset Euality
1'+
1),
1)+
1%,
1%+
11,
11+
1+,
<iFuidity
1%+
11,
11+
1+,
1++
&,
Profitability
(%
(1
(+
-&
-(
--
-*
-,
-'
-)
Capital
Source: The 6anks Association of Turkey2
$n the 1900s! the pace of financial deepening increased thanks to the marketisation initiati"es#
%owe"er! data for end of the period were not much different from those recorded at its beginning# 2s
the persistence of inflation supported inefficiencies in the financial ser"ice pro"ision! short term gains
were e"entually lost# The credit to 59+ ratio increased from 20 percent to abo"e 2, percent before
falling to 20 percent again# Total financial assets to 59+ ratio also fluctuated between 3, percent and
,, percent of 59+# 6ne interesting de"elopment during this period was the increasing interest of
foreign banks in the Turkish financial markets#
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Chart &
Financial Deepening
%,
,,
%)
,+
%1
',
1&
'+
1-
1, ),
Credits 8 0!P Total Assets 8 0!P #1i.ht A5is$
Source: 6AT2
The financial liberali:ation process pro"ed costly in the years that followed! but still! without those
measures! it would ha"e been more costly to stabili:e the economy! both in terms of internal and
e)ternal accounts# The 1910s already pro"ed unsustainable with import substitution based de"elopment
strategy because of the e)ternal account bottlenecks for the import of basic needs# $nternational crises
did not help the Turkish economy in those years either# Europe and the S were trying to sol"e their
inflation problems by following e)tremely high interest rate polices# 4ra:il! 8e)ico and 2rgentina debt
crises placed additional burden on the Turkish economy and Europe was struggling to create its own
single currency# $n this con;uncture! once the priority of low and stable inflation was delayed in fa"our
of increasing infrastructural in"estment! internal account balance deteriorated each year and all types of
well known costs of high inflation engulfed the economy step by step#
0# ost years '"(("*%11"-
The worst economic performance of Turkey was recorded in the 1990s! which is generally
accepted as a lost decade by the academicians and practitioners# %owe"er! it was surprising that though
inflation was high and "olatile since 1912! hyper-inflation ne"er became an issue# 2"erage growth
performance! on the other hand! was the worst e"er! reaching less than 7 percent! which is below the
performance during the 1930s#
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Chart 1+
GDP Growth Rate
#Percenta.e$
1%
(
'
+
/'
/(
04P 0ro"th 1ate #at constant prices$ Avera.e
Source: Turkstat2
6ne possible e)planation for the persistent high inflation short of hyperinflation may be the lack of
financial deepening under capital controls and allowing the asset and liability dolarisation after capital
controls were abolished# +ublic banks were also used e)cessi"ely in order to co"er up temporary
bottlenecks# 2nother argument may be that unofficial economy blocked all hyperinflation risks by
pro"iding fle)ibility under stress#
$n this period! a"erage inflation was 1/ percent at its highest and the current account balance
produced structural deficits# Bomestic debt stock increased regularly as the public sector borrowing
ne"er fell below 3!1 percent and the period a"erage was realised at abo"e 1 percent#
Table ,
Selected Economic Indicators
CP3
3nflation
#9$
1:'
4omestic
4ebt #illion
7S 4ollar:
;ear End$
):,
PS61 8
04P
1
E5chan.e
1ate #T<87S
4ollar$
1
Central 6ank
4iscount 1ate
#9$
1
3nterest
1ate:
Savin.
4eposits
1
Current
Account
6alance
#illion 7S
4ollar$
):1
1&&1 *(2-
1&&% --21
1&&) *(2+
1&&' 1+'2'
1&&, ((2+
1&&* (+2-
1&&- ((2)
1&&( (,2'
1&&& *(2%
%+++ ,*2)
%++1 ,'2)
Avera.e -*2)
%):)(- -2* ':1-, ,*2+ -%2- %,+
%(:%,, -2& *:(-' ,*2+ -'2% /&-'
)%:)(1 -2- 11:+)* ,*2+ -'2( /*:'))
%*:()) '2* %&:-(( ,,2+ &,2* %:*)1
%&:-,* )2- ',:-)& ,+2+ &%2) /%:))&
)(:*&% *2, (1:)(* ,+2+ &)2( /%:')-
'1:)1& ,2( 1,%:+-1 *-2+ &*2* /%:*)(
'':'&( -21 %*+:&-' *-2+ &'2( %:+++
,':,,, 112- '%+:1%* *+2+ '*2- /&%,
,(:)&' (2& *%):-+' *+2+ ',2* /&:&%+
&&:*(- 1%21 1:%%,:'1% *+2+ *%2, ):-*+
'):')) -2* %*+:11- ,(2+ --2% /1:,'(
Source: 1/The Central 6ank of Turkey=
%/Turkstat=
)/ Pakdemirli E2: 1&&1 >Ekonomimi?in 1&%)@den 1&&+@a SayAsal 0BrCnCmC@=
'/ 4oDruel F2: >TCrkiye@de Enflasyonun Tarihi@=
,/ 7ndersecretariat of Treasury of Turkey2
6ne particular e"ent during this period was the 1997 financial crisis3 4ecause of unsustainable
fiscal balance and insufficient primary surplus to counter-balance e)ternal deficit fragilities! the
economy fell into the traps of twin deficits# ?onstantly delayed stabilisation program shattered the
ner"es of financial market participants! and in Manuary 1997! Turkish lira faced sharp depreciation after
more than a decade# 4ecause of the timing of local elections! desperately needed economic package
came three months later! and at one point! the Treasury had to sell bonds with a maturity of three
months at an interest rate of ,0 percent# These shock rates helped ease the unbearable le"els of
"olatility and a new deal with the $8A helped to turn e)pectations into the positi"e realm# %owe"er!
one way or another! the $8A deal was not implemented properly in the years that followed and the
terrible earth.uake in the second half of the 1990s further diminished any hope of a sustainable
reco"ery#
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Chart 11
Financial Deepening
)% &,
&+
)+
(,
(+
%(
-,
%* -+
*,
%'
*+
,,
%%
,+
%+ ',
Credits 8 0!P Total Assets 8 0!P #1i.ht A5is$
Source: 6AT2
Buring the lost years of the 1990s! financial deepening was mainly shaped by credit e)pansion
through public banks and creati"e credit e)pansion tactics of banks using instruments such as back-to-
back credits# Structural problems of the economy that were accumulating since 1912 waited for a
reform agenda in order to decrease high and "olatile inflation and bring the economy to a sustainable
growth path at least close to its potential# &ith this aim in mind! an e)change rate based stabili:ation
program was signed with the $8A in 1999 implying reforms such as establishing an independent
super"isory and regulatory banking authority to increase the .uality of financial stability# +ri"atisation
was put on the high alert agenda! which was a dramatic story because Turkey started its pri"atisation
calendar before the fall of the 4erlin &all# %owe"er! while countries like the ?:ech Republic and
%ungary completed their pri"atisation programs! Turkey@s performance fell far below the cost of
pri"atisation itself# &ith the pri"atisation of the Turkish Telecom and the lack of any "alue assessment
whatsoe"er came the early signs of financial markets stress in 9o"ember 2000# 2n additional financial
aid package from the $8A was not sufficient to pre"ent the worst e"er economic crisis in Turkey#
E)change rate based stabilisation program collapsed and foreign e)change rate regime was changed
o"ernight in fa"our of the floating e)change rate regime! which led to a sharp depreciation of the
Turkish lira# The number of banks facing bankruptcy was increasing gradually since 2ugust 2000 and
peaked after the depreciation of the Turkish lira# The o"ernight interest rates increased to , digits!
which was .uite uncommon in literature# The de"astating impact of the economic crisis left no
alternati"e other than signing of another $8A deal#
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Chart 1%
Financial Strength Sub-Indices
1%,
1%+
11,
11+
1+,
1++
&,
Asset Euality
1',
1'+
1),
1)+
1%,
1%+
11,
<iFuidity
1*+
1,+
1'+
1)+
1%+
11+
1++
&+
(+
Profitability
&,
&+
(,
(+
-,
-+
*,
*+
,,
Capital
Source: 6AT and The Central 6ank of Turkey2
+erformance of the financial stability indicators was at their lowest during the period re"iewed# 2ll
indicators including asset .uality! profitability and capital ade.uacy deteriorated to a certain e)tent# $t
may be worth mentioning that the banking regulation and super"ision performed terribly as many
banks were taking e)cessi"e risks without managing the counter party! credit or e)change rate risks
properly# The licensing was alo loose# The lost years of the 1990s ended not only with the worst
economic crisis! but with the worst and most costly financial crisis! too#
3# 4e&orms5 restructurin/ and the road to E6 '%11"* %112-
The European nion officials ha"e lately declared Turkey as a (proper functioning marker
economy*# This achie"ement was the result of the well-balanced stabilisation program that has been
implemented since 2002# The end result was an a"erage growth rate of more than / percent! which is
almost the highest compared to any decade@s performance3
%
+
+
%
%
+
+
)
%
+
+
'
%
+
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+
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*
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+
+
-
Chart 1)
GDP Growth Rate
#Percenta.e$
1+
&
(
-
*
,
'
04P 0ro"th 1ate #at constant prices$ Avera.e
Source: Turkstat2
There are two main pillars of the new stabilisation program3 $nflation targeting and floating
e)change rate regime# $nflation targeting was implemented implicitly until 200, when e)plicit
targeting took the role# 6ne among so many critical reforms was that the independence of the ?entral
4ank of Turkey! where short-term ad"ances to the Treasury were forbidden! was incorporated into the
Law including a ban on the purchase and sale of Treasury bonds and bills in the primary market# 2
8onetary +olicy ?ommittee was established for the purposes of interest rate setting! while credibility
and transparency of the ?entral 4ank are guaranteed by the new memorandum of understanding#
Table *
Selected Economic Indicators
CP3
3nflation
#9$
1:%
4omestic 4ebt
#illion 7S
4ollar:
;ear End$
):,
PS61 8
04P
1
E5chan.e
1ate
#T<
3
87S
4ollar$
1
Central
6ank
4iscount
1ate #9$
1
3nterest
1ate:
Savin.
4eposits
1
Current Account
6alance #illion 7S
4ollar$
):1
%++% ')21 &&:,%* 1+2+ 1:,+,:('+ ,,2+ '(2% /*%*
%++) %%2& 1)+:1&) -2) 1:'&):+*( ')2+ %(2* /-:,1,
%++' &2' 1,-:(%* )2* 1:'%%:)'1 )(2+ %%21 /1':')1
%++, -2- 1(%:,*, /+2) 1:)'+:-&+ %)2+ %+2' /%%:+((
%++* &2- 1(-:')) /%2+ 1:')1:11+ %-2+ %)2- /)%:+,1
%++- (2' %+&:&%) +21 1:)+1:,1+ %,2+ %%2* /)(:%1&
%++( 1+21 %%%:,,, +2( 1:%&%:&1+ %,2+ %%2& /'1:'1*
Avera.e 1,2& 1-+:++) %2( 1:)&(:%%' ))2- %*2& /%%:)),
Source: 1/The Central 6ank of Turkey
%/Turkstat
)/ Pakdemirli E2: 1&&1 >Ekonomimi?in 1&%)@den 1&&+@a SayAsal 0BrCnCmC@
'/ 4oDruel F2: >TCrkiye@de Enflasyonun Tarihi@
,/ 7ndersecretariat of Treasury of Turkey
The successful implementation of the stabilisation program may not ha"e been possible without the
full commitment to the fiscal discipline that was defined as /#, percent primary surplus# 6wing to this
commitment! public sector borrowing re.uirement fell from 10 percent to the negati"e :one in some
years# 6ne of the main achie"ements of the program was the fall in inflation to single digits!
unprecedented since the 1910s# E)change rate "olatility also eased and some years e"en saw
appreciation of the e)change rate#
$t may be argued that global li.uidity s.uee:e should ha"e helped in this con;uncture and the
argument is well taken# %owe"er! without full commitment! which may be confirmed with the
successful completion of a Stand-by agreement with the $8A! a case ne"er seen before! the targets of
the program may not ha"e been reached! as has been the case with the early deals with the $8A since
19/0#
Successful implementation of the pri"atisation scheme also helped ease the cost of crowding-out#
6nce the Treasury started to collect the re"enues from sold assets! debt rollo"er ratio was reduced
significantly and cash balances increased sharply to decrease the risk premium# The ?entral 4ank also
gained credibility by achie"ing the inflation targets and when this was not the case! by e)plaining
successfully the reasons for the underNo"ershooting of the targets#
There was one side effect of all these achie"ements3 The delayed in"estment during the turmoil
years increased the need for e)ternal funding! which was also supported by the low le"el of domestic
sa"ing rates# 4alance of payment imbalances increased their impact towards the end of the period# $t
may be worth mentioning that when si) :eros were dropped from the Turkish lira! de facto
3
2t the beginning of 200,! si) :eros ha"e been dropped from the Turkish lira#
con"ertibility was also gained as confirmed by the issuance of TR' bonds by international financial
institutions#
4anking sector increased its performance in e"ery year during this period# ?redit and deposit rates
decreased to le"els ne"er seen in the last three decades and re-structuring and re-capitalisation after the
2001 crisis paid back well as the "ulnerabilities of the sector disappeared one by one# 2sset .uality and
profitability rose to unimaginable le"els and there was a heightened interest from international banks to
buy a bank or to look for opportunities for mergers and ac.uisitions# 4anking sector capital ade.uacy
ratio increased regularly as well# +ublic banks@ burden on the system diminished after the re-
organisation# Ainancial Stability Report was produced to gi"e an independent assessment of the
financial system# Together with the $nflation Report! which was introduced a couple of years earlier!
the ?entral 4anks communication set was completed#
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Chart 1'
Financial Strength Sub-Indices
1'+
1)+
1%+
11+
1++
&+
(+
Asset Euality
1%,
1%+
11,
11+
1+,
1++
&,
&+
(,
<iFuidity
1*,
1*+
1,,
1,+
1',
Profitability
11,
11+
1+,
1++
&,
&+
(,
(+
-,
-+
Capital
1*+
1,,
1,+
1',
1'+
1),
1)+
1%,
1%+
3nterest 1ate1isk
1',
1''
1')
1'%
1'1
1'+
1)&
1)(
Forei.n E5chan.e 1isk
Source: The Central 6ank of Turkey
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The Turkish economic and financial stability struggle was in for a turbulent road from the1920s to
2000# %owe"er! the current performance of the economy is .uite strong# $t is belie"ed that the
successful implementation of the 2002 stabilisation program was the main factor behind such
achie"ement # Ainancial stability in Turkey is .uite resilient to the current global crises as the ne)t chart
e)hibits and Turkish banks ha"e been .uite profitably e"en during the last two turbulent years# 9ow!
the challenge is to adapt to the European nion standards#
Chart 1,
Financial Soundness Indicator
1),
1)+
1%,
1%+
11,
11+
Financial Soundness 3ndicator
Source: The Central 6ank of Turkey
6ne of these challanges is to strengthen the credit channel in Turkey# $n order to achie"e this
target! the financial deepening needs an additional acceleration# ?ompared to the E countries! the
figures are .uite low both in terms of total assets to 59+ and credit to 59+ ratios# Turkish banking
system has pro"ed "ery resilient to the current global crises# 6nce the destructi"e impact of the crisis
eases in the years to come! banks will be well positioned to close this financial deepenning gap and
increase their share in the economic acti"ity# $t may be argued that a stronger banking system will
decrease the cost of adaption to the E standards#
%
+
+
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+
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)
%
+
+
'
%
+
+
,
%
+
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*
%
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-
%
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(
Chart 1*
Financial Deepenning Indicators
), -+
)+
*,
%,
*+
%+
,,
1,
1+
,+
, ',
Credits 8 0!P Total Assets 8 0!P #1i.ht A5is$
Source: The Central 6ank of Turkey
2# !onclusion
The independence of the Republic of Turkey was declared in 1923# $nitial conditions after the
collapse of the 6ttoman Empire were not ideal for a ;ump-start of economic acti"ity that would lead to
strong growth rates without structural reforms and re-structuring# There was no hard currency inherited
and operating capital was so scarce that central banking was outsourced to Arench bankers# The basic
element for sustainable growth! human capital! was insufficient and inefficient because of long wars
and conflicts that led to destruction of producti"e human capital#
$n the early decades after $ndependence! the priority was gi"en to institutional reforms for a
sustainable growth path under low inflation and financial stability# To this end! the rational approach of
the 'oung Republic to the finance and banking managed the risk of a banking or a financial crisis
carefully and confronted the total collapse of already scarce capital accumulation potential#
%eightened political unrest in Europe leading to the &orld &ar $$ forced the 'oung Republic to
rely on a (mi)ed* system for sustainable growth and financial stability# 6n one hand! pri"ate
in"estment and ownership were gi"en incenti"es including direct capital in;ection for the production
andNor distribution of basic consumption goods# 6n the other hand! the State in"ested in sectors that
were strategically important for po"erty and hunger reduction# The mi)ed economic system of
de"elopment did not pro"oke high inflation rates or lead to financial chaos e"en under e)treme global
risk perception during those difficult years#
The end of decades of global wars and conflicts pro"ided new opportunities for a new paradigm to
sustain growth and financial stability# +ri"ate ownership and greater participation of pri"ate capital in
economic acti"ity were gi"en additional incenti"es# +ri"ate banking de"eloped fast with the emergence
of new banks# 8arshall aid package also pro"ided a new capital base for infrastructural in"estment#
Turkey e)perienced high le"els of growth and strong total factor producti"ity in the 19,0s# There was
no serious pressure on financial stability other than small-scale balance of payment difficulties leading
to de"aluations# E"en with strengthened policy towards liberalisation during 19,0s! public banks
e)tended their leading role in the financial system because of the general shortage of capital#
2fter the military coup in the 19/0! an import-substitution growth strategy was initiated .uite
successfully and the Turkish economy e)perienced the best growth performance of its short e)istence#
2 semi-socialist planning strategy successfully dominated the Turkish economy with (fi"e-year plans*
influencing banking and finance as well# 2 clear list of strategically important sectors was announced
and supported through all kinds of incenti"es! from ta) e)emptions to pro;ect finance credits or ease of
access to credit through guarantees# $n the early phase of its implementation! the program based
de"elopment strategy pro"ided high growth rates under low inflation rates#
&ith hea"ily regulated interest and foreign e)change rates! branch banking became a norm without
any pressure of competition in the 19/0s# +ri"ate entrepreneurs relied on (holding banking*
7!
which
was also encouraged by ta) incenti"es# $ndustrial holding companies wanted to ha"e a bank in order to
finance their potential in"estments as most of the deposit base of the financial system was strictly
channelled to (planned* or (programmed* prioritised in"estment pro;ects# Then came the oil crisis of
the 1910s and took away all the resources for the emergence of strong pri"ate banks# The capital
accumulated in the last decade was wiped out by the balance of payment crises# The 1910s may best be
defined as lost years partly because of shortsighted monetary and fiscal policies but also because of the
increased political tension within the society# Lack of sufficient hard currency reser"es .uite often led
to de"aluations and a strategic mistake to dollarise the central bank balance sheet sharpened the
destructi"e effects of the turbulence# 2"erage growth rate for the decade fell sharply#
2fter the balance of payment crises and serial depreciations in the second half of the 1910@s! a
liberalisation initiati"e triggered free setting of deposit and credit rates to support market discipline#
The second half of 1900s was the period when pri"ate banks began winning a market share# Aollowing
the strong growth performance of the 19/0s! a new period of strong de"elopment began! but unlike
during the 19/0s! high and "olatile inflation turned out to be persistent as well# The chart below
e)hibits the annual growth rates from 1923 onward3
7
The term refers to priorising irrationally a group <holding> company in credit allocation#
1
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%
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Chart 1-
GDP Growth
#Percenta.e$
)%
%(
%'
%+
1*
1%
(
'
+
/'
/(
/1 %
/1 *
0 4 P 0 ro " th 1 a te #a t c o n s ta n t p ric e s $ A v e ra.e
Source: Turkstat2
2ccumulation of capital in this decade came at a price3 The bankers crisis in 1903! which had
emerged as a pon:i game! wiped out certain gains in this area# Sustainable growth with low and stable
inflation remained a distant dream#
The 1990s may be described as another (lost decade* in terms of banking and financial stability#
The 1997 banking crises played a critical role in this definition# %owe"er! due to the lack of dedication
to social welfare and economic re-structuring! fiscal deficits crowded out so much that the whole
banking system fell into another crisis in 2001# Replacing the import-substitution growth strategy of
the 19/0s with e)port-led growth strategies re.uired a competiti"e e)change rate policy that came at a
price3 E)change rate pass-through created a "icious-circle of de"aluations followed by heightened
inflation persistence# 5rowth rate "olatility increased sharply and both economic and financial stability
became an unreachable targets without e)ternal aid# The $8A agreements came one by one and none
was followed by successful implementation# The liberalisation of capital account to eliminate all
controls and to declare (de ;ure* con"ertibility was ill-prepared in 1990 without financial reforms and
high .uality super"ision and regulation# Ainancial system failed to adapt to the new paradigm and
banks were often bailed out through nationalisation#
Since the 1997 banking crisis! the Turkish economy in general! and banking system in particular!
relied hea"ily on $8A agreements for both credibility gains and e)ternal balance sustainability# 2n
e)change rate based stability program in 2000 failed to gi"e a boost to economic stability and the 2001
financial crisis wiped out another round of capital accumulations#
2fter 2002! Turkish economy e)perienced a "ery high le"el of growth that came with low and
decreasing le"el of inflation# 2 "ery long list of reforms and re-structuring programs! including
banking and finance! supported this paradigm shift# 2s a candidate economy to the European nion!
Turkey has been declared a market economy and the current challenging target is to adapt the
producti"ity and efficiency to the European le"els# The global crisis that has been dominating the
world since 2ugust 2001 has made free access to e)ternal finance e"en more difficult# Turkish
economy is now facing the challenging task of increasing domestic sa"ings to support sustainable
growth under low and stable inflation and support domestic demand to get rid of the risk of recession
without increasing the risk premium#
4e&erences
?hant! M#! 2003! (Ainancial Stability 2s a +olicy 5oal!* in Essays on Ainancial Stability! by Mohn
?hant! 2le)andra Lai! 8ark $lling! and Ared Baniel! 4ank of ?anada Technical Report 9o# 9,
<6ttawa3 4ank of ?anada>#
?rockett! 2#! 1991! The Theory and +ractice of Ainancial Stability! 5E$ 9ewsletter $ssue 9o# /! nited
Oingdom! 5on"ille and ?aius ?ollege ?ambridge! 11F12 Muly#
Ba"is! E#+#! 1999! Ainancial Bata 9eeds Aor 8acroprudential Sur"eillance- &hat are the Oey
$ndicators of Risks to Bomestic Ainancial StabilityP! ??4S %andbooks in ?entral 4anking Lecture
Series! 9o#2#
Beutsche 4undesbank! 2003! Report on the Stability of the 5erman Ainancial System! 8onthly Report!
Arankfurt! 5ermany#
Bogruel A#! Bogruel 2#S#! 200,! QTHrkiye@de Enflasyonun Tarihi@! Tarih RakfI#
Aerguson! R#! 2002! (Should Ainancial Stability 4e 2n E)plicit ?entral 4ank 6b;ecti"eP*
<&ashington3 Aederal Reser"e 4oard>#
5orme:! '#! 2000! ! (4anking inTurkey3 %istory and E"olution*! 4ank of 5reece &orking +aper
Series 9o303#
8ishkin! A#! 1999! 5lobal Ainancial $nstability3 Aramework! E"ents! $ssues! Mournal of Economic
+erspecti"es! Rol# 13! iss# 3#
8oen;ak! T#! &arangkana! $#! Rimolchalao! &#! 2007! 8onetary +olicy and Ainancial Stability3
Ainding the Right 4alance nder $nflation Targeting! 4ank of Thailand Biscussion +aper#
+adoa-Schioppa! T#! 2003! (?entral 4anks and Ainancial Stability3 E)ploring the Land $n 4etween!* in
The Transformation of the European Ainancial System! ed# by Ritor 5aspar and others <Arankfurt3
European ?entral 4ank>#
+akdemirli! E#! 1991# Ekonomimi:in 1923Dden 1990Da SayIsal 5GrHnHmH# 8illiyet 'ayInlarI! Kstanbul#
Schinasi! 5#M#! 2003! Responsibility of ?entral 4anks for Stability in Ainancial 8arkets! $8A &orking
+aper! 9o# 121#
Schinasi! 5#M#! 2007! Befining Ainancial Stability! $8A &orking +aper 9o# 07N101#
Silier 6# 191,! 1920@lerde THrkiye@de 8illi 4ankacIlIJIn 5enel 5GrHnHmH! THrkiye Kktisat Tarihi
Semineri! %acettepe#
&ellink! 9#! 2002! ?urrent $ssues in ?entral 4anking! 6ran;estad! ?entral 4ank of 2ruba!
9o"ember 17#