Due to the economic crisis, the AKP, which was led by Erdogan, won the elections of Nov’02. The government took various measures to improve the financial environment. A new Law on FDI reduced the level of bureaucracy for international companies and resulted in a significant foreign capital inflow into the country. There were other important reforms like large profit tax cut and tax legislation simplification. Privatization of state enterprises was done. Hence the AKP received a lot of goodwill in Turkey and in foreign countries. The financial reforms taken by the AKP helped the country achieve greater macroeconomic stability and high levels of growth in the following ...view middle of the document...
To strengthen the capital structures of state banks, a total of USD 22bn was provided by the SDIF at the end of 2001. Along with this, USD 28bn in total was transferred to banks under Savings Deposit Insurance Fund control to strengthen their capital structures. The budget of the Savings Deposit Insurance Fund was financed by the Turkish government, by issuing bonds. This amounted to 31% of GDP in 2001. At the same time, the government debt rose to 74% of GDP.
The regulatory and supervisory framework was strengthened by various amendments in banking laws, in line with international best practices and particularly EU directives. The government initiated various measures to minimize financial risks, like capital adequacy ratios were raised to 12% as compared to international regulations which reqd. only 8%. Foreign currency lending was permitted only for the companies having revenues in foreign currency so as to minimize the foreign exchange mismatch on the banks’ balance sheets significantly. There were some other regulations like the inclusion of repo transactions on balance sheets.
Although the government debt was high, the Turkish government did not default on its debt. In June’01, the Turkish government, which faced the rollover problems, managed a voluntary debt-swap operation. Turkish lira government securities held by Turkish private banks were exchanged for USD-denominated bonds, to lengthen the maturities of government debt and help banks to cover their negative foreign exchange positions. For assuming the exchange rate risk, the maturities were lengthened. Though the avg. maturity of the old lira bonds was at around 5 months, the new USD bonds were having an avg. maturity of 36 months.
Restructuring of public debt along with corporate debt was done to help corporates recover from the crisis. Because of the large devaluations of the Turkish lira in Feb’01, most of the firms were unable to service their debt. For helping them to sustain their activities, a program for restructuring the manufacturing firms’ debt to the financial sector, the “Istanbul Approach”, was introduced in June’02. A sum of USD 6bn corporate loans was restructured.
The Economic Recovery:
The Turkish economy turned around very quickly as the program restored confidence. The industrial production started increasing in late 2001, and the initial half of 2002 saw the recovery in industrial output increasing rapidly, along with a 30 % point drop in inflation. Business confidence surged into positive territory.
The public finances have been put on a sound footing for the long term: The total government debt rose to over 100% of GNP in 2001 due to impact of fiscal profligacy during the 1990s, 2001 crises and the devaluation of the lira. Since then, sustained fiscal adjustment has brought the budget into approximate balance and, with some help from an appreciating real exchange rate, has slashed the debt burden by almost half.
Control on inflation: In the 20 years leading...