ISTANBUL, Turkey — At the start of the financial crisis, Prime Minister Recep Tayyip Erdogan seemed confident that the troubles of financial markets abroad wouldn’t scratch the shiny veneer of success that the Turkish economy has cultivated in recent years.
Time and again he has argued that there is no need for Turkey to renew a multibillion-dollar loan program with the IMF that expired in May 2008.
“The crisis has bypassed Turkey,” he said last fall, with more than a hint of swagger.
Since then things have changed.
Youth unemployment rose to a historic 16 percent last February, leaving one in four jobless. Exports declined nearly 40 percent in May as compared to last year's figure. The GDP shrank by a record 13.8 percent in the year to the first quarter, making Turkey one of those countries hardest hit by the crisis.
Now, as the fund's annual meeting approaches — this year it is being held, of all places, in Istanbul, Oct. 6 and 7 — Erdogan is beginning to talk about doing a deal with the IMF after all — a move that is being widely debated within Turkey and among international economists.
Local opposition to any deal became all too obvious this week in Istanbul when anti-IMF protesters interrupted an address Thursday by the IMF's managing director, Dominique Strauss-Kahn, at Bilgi University. One protester threw a shoe at Strauss-Kahn as he spoke about the global economy. The man then tried to storm the stage, before police intervened and escorted him away.
The Hurriyet Daily News quoted the IMF director for external relations, Caroline Atkinson, as saying that Strauss-Kahn laughed over the shoe-throwing incident and said “students are students.” Strauss-Kahn said earlier Thursday that there was no tension between Turkey and the IMF over a possible loan from the Washington-based fund, the newspaper reported.
But in Turkey, which has had nearly 20 IMF loan programs, the IMF is still seen as a symbol of foreign pressure. According to the Anatolia news agency, the shoe thrower could become a symbol of resistance to that pressure.
Under any agreement between Ankara and the IMF, the fund would likely pump up to $20 billion into the Turkish economy. But to get an IMF loan, Turkey would have to reduce its deficit, which would mean cuts in government spending or increased taxes. In other words, the IMF is seen as the cause of potential financial pain.
Despite the enormous impact of the financial crisis on Turkey, the government appears to have insulated many from the effects. On the streets of central Istanbul, life goes on very much as it did before the crisis hit, with bars and restaurants packed and Champagne-drenched clubs blasting music into the night.
The financial markets are holding their breath as they wait to see if Turkey will take the plunge and sign a new IMF deal or go it alone.
Meantime, analysts are divided over whether Turkey should accept the IMF deal.
“Recent improvements in the market and the economy seem to have created hopes and assertions that Turkey can survive the current downturn without IMF assistance,” said Bodhi Ganguli, an economist at Moody's. “While this is true in the immediate short run, a deal with the IMF will be necessary for medium- to long-term stability of the Turkish economy.”
Murat Ucer, an Istanbul-based analyst for the consultancy Global Source, said a deal is a distasteful, but necessary, evil.
“If Turkey had the credibility and the policy making capacity to go it alone there would probably be no need for the IMF," he said. "But the unpleasant reality is that we don’t have these and we need the IMF leash.”
Joseph Quinlan, a fellow at the German Marshal Fund, said that given the global financial system was “normalizing,” an IMF loan could prove unnecessary.
“Turkey can avoid an IMF lending facility given the upturn in the global economy — the latter has rebounded faster than expected, with Europe, Turkey's key export market, on the mend,” he said.
When Turkey backed away from IMF talks in February, economists warned that the government had risked its credibility with investors. The fears were unfounded: Since negotiations were suspended, the Istanbul Stock Exchange has risen 79 percent, yields on Turkish government bonds have fallen to record lows and the 5.4 percent inflation rate is below the central bank’s year-end target.
“If things continue like this Turkey should be able to grow their way out of their problems,” Quinlan said.
The crux of Turkey’s hesitation in signing a new agreement is government opposition to IMF demands that will tighten up the budget and make it more transparent, as well as decrease public employment and limit political influence over the economy.
"If they bring us an IMF deal in line with Turkey's interests, then we will sign it," Erdogan told the daily Sabah recently. "They want us to make the Revenue Administration an autonomous institution. That is not possible."
Ganguli thinks such hesitation is foolish, arguing that the IMF conditions are logical, even crucial. “Over the medium or longterm, the Turkish government needs to adopt a policy of fiscal prudence to keep its budget deficit in check and to ensure that sudden shocks do not destabilize the government's fiscal policy or the macroeconomy,” he said.
Foreign investment an issue
The other issue at the heart of the debate is the question of how foreign investors would react to a new deal.
“An IMF deal would signal to investors that the government is committed to structural fiscal reforms and longer-term stability and would inspire confidence among investors, a key to future growth,” Ganguli said.
But while skeptics warn prolonged negotiations could turn off foreign investors, Erdogan has remained defiant, saying Turkey can revive its economy with domestic resources. Many, including Quinlan, agree.
“A deal would be a mistake, it would give more confidence to foreign investors if Turkey is able to manage their own economy,” Quinlan said.