Turkey's Economy
The 2001 Crisis and Recovery
How weak banks and high public debt caused Turkey's 2001 financial crisis, and how reforms including an independent central bank led to recovery.
In February 2001, Turkey suffered a severe financial crisis.
Causes
- High inflation for decades.
- Large public debt and deficits.
- Weak banks, many holding government debt and making connected loans.
- A currency peg that became unsustainable.
The crash
- The lira was floated and lost about half its value.
- Interest rates spiked.
- The economy shrank by around 5 to 6 percent in 2001.
- Many banks failed.
Reforms
Economy minister Kemal Derviş led reforms with IMF support:
- Central bank independence, focused on price stability.
- Bank restructuring and a strong banking regulator.
- Fiscal discipline with primary surpluses.
Results
- Inflation fell from over 50 percent to single digits by the mid-2000s.
- Turkey removed six zeros from the lira in 2005, launching the new Turkish lira.
The six zeros
In 2004, a loaf of bread cost hundreds of thousands of lira. After 2005's redenomination, the same loaf cost less than one new lira.
Thinking Turkey's inflation problems are only recent
Turkey had high inflation for decades before the 2001 reforms.
Key takeaways
- Weak banks, debt and a peg caused the 2001 crisis.
- The lira lost about half its value.
- Reforms included central bank independence and bank restructuring.
- Inflation fell to single digits by the mid-2000s.
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