Recommendation

Turkey and the aftermath of the 2001 crisis

• Turkey suffered a serious crisis in 90s that left it with a high level of public debt. Public debts were at 80% of GDP in 2001.

• To tame growing public debt and weak economy especially in financial sector, the Turkish authorities negotiated an IMF Stand-by Arrangement in December 1999. IMF provided financial assistance of US$10 billion

• Despite financial assistance and the implementation of IMF policies, Turkey economy remained weak. Additional fund were provided by IMF with revised program in 2002.

What Turkey accomplished• In less than a decade it halved its gross

public debt, from 77 percent of GDP to 39 percent in 2008 and even during the global economic crisis of 2009, Turkey’s debt rose only marginally to 41 percent of GDP

• The general government deficit fell from 15 percent GDP in 2002 to 3.5 percent in 2010. Turkey decreased its borrowing requirement from 12 percent of GDP in 2001 to almost zero in 2007.

• The inflation rate fell from 84 percent in 1998 to 8.6 percent in 2010.

• Macroeconomic stabilization improved Turkey’s credibility abroad

How Turkey accomplished it

• Renewed economic growthA well-tailored response to the crisis helped revive economic growth. Growth between 2002 and 2010 averaged about 5 percent. Strong economic performance, fuelled by set of reforms implemented during the crisis, allowed Turkey to grow out of debt.

• A primary budget balanceSecond, between 2002 and 2006 Turkey recorded, on average, primary budget surpluses of 3 percent of GDP. Fiscal consolidation adopted by the government addressed mainly the expenditure side of the budget. Embarking on transparency and predictability of public finances proved to be particularly beneficial.

How Turkey accomplished it (Cont)

• Real exchange rate appreciationAs a bulk of the public debt was denominated in or indexed to foreign currencies, the strengthening lira helped to reduce country’s indebtedness. Turkey has been also working on improvements in the investment and business climate.

• Falling interest ratesFalling interest rates reduced the cost of debt servicing. The government improved the management of public debt by optimizing the cost of borrowing through, among other avenues, extended maturities of debt issuance and borrowing in domestic currency at fixed rate

The Transformation of the Brazil Economy

• In 1998, Brazil faced a severe fiscal crisis. And so, like many other countries around the world, it turned to that international lender of last resort, the International Monetary Fund. What makes this story extraordinary, however, is that by 2009, Brazil had stabilized and grown to the point where it actually lent money to the IMF in order to help shore up the lenders ability to deal with the global financial crisis.

• The extraordinary transformation was due to the fact that despite the election in 2002, the government of Brazil stuck to policies consistent with the previous administrations agreements with the IMF. In doing so, they were able to repay the IMFs loan two years ahead of schedule.�

• The consistency of policy obviously helped the Brazilian economy. But what also helped was the more limited role taken on by the Brazilian government, in accordance with the list of policy prescriptions given by the IMF.

Published in the Express Tribune, June 7th, 2010.

Resolving Obstacles in Economic growth

Economics growth can be revive by resolving critical issues such as:

• Energy Crisis• Law and order• Corruption • Lack of infrastructure

Debts audit and cancellation of unjust debts

• For four decades, Pakistan’s debt has been huge. The enormous revenue spent on debt payments has greatly reduced the country’s ability to tackle crippling economics issues.

• Debt audits investigate the legality and legitimacy of loans. For example, where lenders failed to exercise responsibility over loans, the people of Pakistan should not be forced to repay debts that have caused damage.

• Following a comprehensive debt audit, any illegal or illegitimate debts should be cancelled and the money saved should be converted into social development.

• Ecuadorian government held a public debt audit in 2008, which concluded that the majority of that country’s debts were ‘thoroughly illegitimate’. Following the audit, Ecuador’s debt to the rest of the world fell to 23% of national income, saving $2 billion immediately and a further $7 billion of future interest.

Implement tax reforms

• Pakistan’s government currently collects between just 12–14% of GDP as revenue. This is well below the 20% average for developing countries in Asia.

• Revenue must come from progressive taxation on the income and wealth of richer individuals and companies. In particular, taxes on the wealthy land-owning elites are needed, not regressive increases in taxes such as VAT which have already increased inequality in Pakistan.

Rebalance public Expenditures• Pakistan currently spends around 3% of national income - on

the military. This is over one-fifth of government revenue. Pakistan’s high military costs, and the costs of the global ‘war on terror’, much of which has taken place in Pakistan.

Debts Management• The government should commit to living within its means and

should limit additional foreign borrowing to finance wasteful government expenditure.

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Appreciating the Rupees

• Pakistan badly needs fresh foreign money for boosting foreign exchange reserves and to ease down pressure on Pak rupee.

• The assistance of a $6.6 billion loan from the IMF may be a ray of hope but at the cost of crowding out of the private sector, because in order to fulfill the conditions set by the IMF, the government hiked the interest rates.

• Given the heavy amount of external debt payable, the currency depreciation will put heavy burden on the country’s economy.

• In current scenario, total foreign debt of the country stood about at dollar 61 billion and depreciation of one rupee per dollar would increase the debt by Rs61 billion.