Couple of Details for 1994 Currency Crisis occured in Turkey


Central Banks (CBs) usually provide collection of foreign currencies in the market place, which correspond to capital-inflows, in exchange of providing national money (TRY) to the market. Also, CBs aim to avoid from additional liquidity in the market by providing valuable papers in order to prevent inflationist effects; so that monetary expansion can be achieved. On the other hand, Turkish Central Bank (TCMB) preferred to alter additional liquidity by providing treasury bonds. Hence, while public expenditures increasing, public revenue remained same. In other words, debt of public significantly increased, which refers to the burden of interest.

It is possible to provide four eras in terms of stability strategies:

i) 1989–1994: The era of high inflation due to high prices and CB frequently borrowing from Treasury.

ii) 1995–1999: Due to increased risk-premium coming from 1994-crisis, borrowing rates also severely increased.

iii) 2000–2001: Negative effects of anti-inflation strategies.

iv) After 2001: The era of fluctuating exchange rate.

See below: Balance of Payment (Table 1) & basic economic indicators. (Table 2)


As can be seen above, Table 1, current deficit in 1990 (USD 2.625 billion) grows and reaches to USD 6.5 billion in 1993.

Between the years of 1995–2000, current account deficit occurred every year except the year of 1998. Same situation can be seen after 2001-crisis, too, between years of 2002–06.

Current account deficit refers that Turkısh economy spent more than it earns. Current account deficit nourished through domestic investors selling their financial assets and not acquiring any more later on, just like foreign investors did beforehand.

On the below, Table 2 suggests that after 1994-crisis overvaluation of the national currency, entry of hot money and dollarization occurred, in the year of 1996. Interest rate increased.



Turkısh Economy became more fragile after the elimination of restrictions on capital movements. Therefore, it can be stated that 1994 crisis was not a surprise. We see that dollar reserves are gradually shrinking. Public sector had financed by the expansion of domestic credits. We see that government avoided devaluation considering forthcoming elections, so that it increased interest rates.

Increasing need of source for public sector borrowing requirements (PSBR) aimed to be financed by internal and external borrowing. Basic reasons of 1994 crisis can be stated as; inevitable increase of inflation, imbalanced fiscal policies & the high share of hot money for total of debts and current exchange reserves, in terms of short-term debt. (See Table 3)


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