1994 Financial Crisis in Turkey

Abstract

One of the deepest crises Turkey experienced in the 90s was the 1994 Economic Crisis. The crisis did not arise out of nowhere. Its roots date back to 1980. The mistakes made in some of the policies that started to be implemented with January 24, 1980, stabilization program, the seeds of the 1994 economic crisis began to be planted. Financial liberalization and liberalization in foreign trade in the following period resulted in the Turkish economy, which was not yet ready, to face a crisis. This chapter aims to give detailed information about the 1994 Economic Crisis that occurred in Turkey. In the study, the place of the 1994 economic crisis in the literature and the reasons for its emergence were tried to be explained in detail. With the onset of the crisis, its effects on the country's economy were revealed, and the exit strategy from the crisis was explained. While explaining the causes and effects of the crisis, some economic indicator figures before and after the crisis were used. In this context, data sets such as growth, foreign trade, interest rate, international reserve amount, foreign capital inflow and outflow figures, inflation, and exchange rate were used for certain periods between 1980–1994. Although there are many factors that led to the 1994 economic crisis, each one has a different effect and cannot be said to have caused the crisis on its own. Intense short-term speculative capital inflows to the capital markets with the financial liberalization, the deterioration of the current account balance as a result of the overvaluation of the Turkish lira, the unsustainable level of public deficits, high inflation, excessive public debt and public sector borrowing requirement, attempt to keep treasury borrowing rates below market rates, open positions of banks, decrease in international reserves of the Central Bank, borrowing from the Central Bank to finance public deficits can be counted among the main causes of the crisis. The 1994 economic crisis, which was one of the deepest crises in the 90s, caused the country's economy to shrink by as much as 6%, the national currency to depreciate excessively, inflation to hyperinflation levels, and overnight interest rates to reach astronomical levels. As the exit strategy from the crisis, the economic decisions of April 5, 1994, were announced, and the policies expected to eliminate the effects of the crisis in theory began to be implemented. Unfortunately, April Economic Stability Program did not provide a permanent stability and recovery in the economy and could not prevent the emergence of new economic crises in the medium and long term, because the necessary structural reforms were not fully made and implemented decisively.