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Turkey stops exchange rate controls
February 22, 2001
ISTANBUL, Turkey (AP) — Turkey responded early Thursday to a mounting financial crisis by dropping its exchange-rate controls, effectively allowing a devaluation of the lira.
The government and Central Bank hope the move will bring skyrocketing interest rates under control, but analysts were predicting a sharp fall in the value of the Turkish lira when markets open later Thursday.
Overnight lending rates reached an annualized 7,500 percent Wednesday and the stock market saw its steepest fall ever Wednesday, losing 18 percent. The market turbulence was fueled by fears of a major political crisis following a clash between the country's top leaders.
By dropping the exchange-rate controls, Turkey is abandoning a key element of an economic stabilization program backed by $11 billion in loans from the International Monetary Fund. The government said it remains committed to the program.
Economist Deniz Gokce said the move would lead to a devaluation of the lira, and push inflation back up in the short term from its current 14-year low. Roughly 688,000 Turkish lira equal $1.
The country's inflation rate stands at some 30 percent, down from 70 percent in 1999, and the government's rate target for 2001 is 10-12 percent. An Anatolia news agency report that could not be confirmed said the government would revise that target upward.
The exchange-rate decision was issued by the government in a statement released after a 10-hour meeting between Prime Minister Bulent Ecevit, his top ministers and Central Bank officials.
``Due to the recent economic conditions, the exchange rate will be left to float freely,'' the statement read. Economy Minister Recep Onal said the decision was effective Thursday.
The economic stabilization program has been under pressure since November when foreign investors were scared off by allegations of corruption in the banking sector.
A new crisis was sparked Monday, when Ecevit stormed out of a meeting with President Ahmet Necdet Sezer, upset after the president criticized the government for failing to battle corruption.
Political stability is seen as essential to the success of the program, and the clash between the country's two top leaders led to fears of a government collapse. Ecevit's three-party coalition government is Turkey's most stable in years.
``The Turkish problems are in fact more political than economic,'' said Faruk Selcuk, economic professor at Ankara's Bilkent University.
Fears that the crisis in Turkey may affect other emerging markets, led Mexico's peso, Brazil's real and Peru's nuevo sol to close weaker against the dollar Wednesday.
Standards & Poor said Wednesday it was considering whether to downgrade Turkey's credit ratings.