Time for Turkey to call the IMF

It is said that countries call on the International Monetary Fund with the same enthusiasm that patients go to visit their oncologists. However there are situations, such as that in which Turkey now finds itself, where there is no alternative but to call upon the IMF.

Sadly for both Turkey and the global economy Mr. Erdogan is having trouble recognizing this basic truth. That raises the real prospect that Turkey will soon be forced to adopt exchange controls and default on its debt.

Among the more compelling reasons why Turkey needs an IMF economic adjustment program is that it has a major balance of payments problem. Not only has Turkey’s external current account deficit widened to 5 percent of GDP as a result of the overheating of its economy, Turkey also has a mountain of short-term external debt that it needs to roll over. It is estimated that Turkey’s external financing needs in the year ahead are well over US $200 billion, or around 25 percent of GDP.

In addition to needing IMF financing, Turkey also needs the IMF to provide it with a seal of approval for any stabilization program that it might now adopt. This is especially the case since Mr. Erdogan has managed to lose all credibility in the markets. He has done so by his repeated unorthodox statements that high interest rates cause inflation, by his constant undermining of the central bank’s independence, and by his appointment of his singularly unqualified son-in-law to be finance minister.

Two major obstacles stand in the way for Turkey to approach the IMF. The first is that Mr. Erdogan would have to swallow humble pie and in effect admit the waywardness of his past economic policies. The second is that Mr. Erdogan would have to mend fences with the United States, the IMF’s largest shareholder, which would need to sign off on any IMF deal for Turkey.

For which reasons, I am not holding my breath that Mr. Erdogan will call upon the IMF anytime soon and I am expecting that the Turkish economic crisis will only deepen.

Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund’s (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.