The Economic Crisis After The Embargo Of The 1974 Cyprus Operation: Its Implications In Financial Markets, And Effects On Inflation, Interest And Fx Rates
The most important result of the Cyprus Peace Operation for Turkey is the embargo imposed by the United States. Namely, the point that the Turkish economy and industry has reached today is closely related to this issue. In this period, when the political administration at that time was in a very difficult situation economically, Turkey experienced difficulties in the supply of all the consumer goods it was dependent on, and had to reduce its domestic production due to the shortage of resources and inputs. Apart from the economic difficulties in the said years and afterwards, Turkey met with terrorism, student incidents, political conflicts, etc. happened during this period.
The financial burden brought by the Cyprus Peace Operation in 1974, political instability, terrorism, political strikes and layoffs also played a very important role in the deterioration of the economy.
The operation drew the reaction of some countries and our country was caught in the embargo grip; The ever-increasing deficits of State Economic Enterprises increased public expenditures unexpectedly on the one hand, and triggered high inflation in the country on the other hand; As a result of all these, public expenditures grew and significant erosion occurred in taxes.
The embargo, political instability and other negative developments increased the need for external financing to enormous dimensions. The embargoes experienced due to the Cyprus Peace Operation are shown as the main reasons for the instability of the Turkish Economy.
With the effect of the Cyprus Peace Operation and the embargo applied to Turkey, economic bottlenecks were entered in the country's economy, especially in terms of infrastructure. Contrary to the expectations of import substitution policies in this period, the increase in imports as a result of foreign dependence of import substitution industrialization and the wholesale import substitution policy of less developed countries resulted in the widening of foreign deficits of less developed countries. In Turkey, the external deficit has widened and the balance of payments has always been in deficit.
The embargo imposed on Turkey caused significant foreign exchange loss. With the cessation of foreign loans, it was not possible to import the inputs used in production. As a result of supply-demand mismatch in basic goods, shortages have emerged. Black market and queues formed. Thus, the closed economy model that has been implemented since 1932 resulted in a crisis.
Towards the end of the 1970s, public investments as well as private sector investments came to a standstill. This revealed the necessity of abandoning the import substitution industrialization model. The January 24 decisions taken in 1980 and the stability program implemented afterward were designed to overcome the crisis. In making such a proposal; High inflation, foreign exchange and energy bottlenecks, and demand pressure with exports coming to a standstill were effective.
The embargo and oil shocks also increased the need for external financing. With these global economic negativities; With inflation, budget deficits, political instability, social tensions and finally the military coup, the Turkish economy went through a structural break. Investments made due to these negative developments and expenditures made in the field of energy and transportation caused significant public deficits; In this period, public deficits financed by the Central Bank began to be covered by domestic and foreign borrowing. The fact that borrowing from the Central Bank created severe pressures on inflation in the economy caused more emphasis on domestic borrowing in this period. Again, the foreign debts taken in this period were used in the previous foreign debt payments, and sometimes the external debt was paid with the domestic debt.
Between 1970 and 1980, the GDP increased steadily, but there were fluctuations in growth, inflation and unemployment figures. Inflation jumped in 1971, 1974, 1978 and 1980, approaching triple-digit inflation. In the same years, although there were decreases in growth figures, there was a contraction in the economy in 1979 and 1980. It is seen that events such as the internal political conflicts, the Cyprus Peace Operation and the 2nd Oil Shock during the 1970s affected the Turkish economy.
With the embargo and sanctions, Turkey met with high inflation. This high inflation effect continued until 2004.
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The embargo and sanctions also left similar negative traces on interest rates. After the operation and embargo, the CBRT rediscount interest rates increased dramatically. High interest rates continued until the 2000s.
By 1978, the inflation rate had reached 48%, the foreign debt amount had increased to 4.8 billion dollars, and the growth rate had decreased to 1.2%. Due to the lack of internal and external resources, production capacity has been limited in almost every field. Under the pressure of rapidly increasing costs, the production and competitiveness of the economy decreased. The cost of living has steadily increased due to the general level of rising prices. Under these conditions, a strictly statist import-substitute economic structure, which was largely closed to the outside, faced various difficulties.
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**The issue of removing six zeros from the Turkish Lira in 2001 was excluded.
Since 1974, parallel to the increase in inflation and interest rates, the Turkish Lira has depreciated dramatically against the US Dollar. While one US dollar was 14 Turkish Liras before the embargoes, the exchange rate entered a rapid upward trend after the embargo and this rise continued until 2003. In 2003, 1 US Dollar increased to 1,493,000 Turkish Liras.
Two stabilization programs were put into practice in 1978 and 1979 after the negotiations with the IMF due to the need for external resources to overcome the crisis. In order to ensure fiscal discipline, increasing the products of State Economic Enterprises, increasing taxes, disciplining public expenditures, especially salaries and wages; Stabilization programs including items such as devaluation, restriction of imports and promotion of exports to close the current account deficit could not be fully implemented due to the rapidly escalating political instability.
The embargoes had a negative impact on Turkey and most of its export revenues came to a level that could only cover oil imports. The current account deficits, which were effective in the growth of the embargo applied after the Oil Crisis and the 1974 Cyprus Peace Operation, and the exchange rate policy that led to the appreciation of the Turkish Lira, were initially able to be met with short-term capital inflows. However, in 1977, international financial institutions were consulted in order to overcome the bottleneck in the balance of payments that had occurred since 1977. The fact that price increases in Turkey exceeded 50% a year first emerged in the crisis of 1978, and this rate exceeded 100% due to the high rate of devaluation in 1980, the increase in the prices of State Economic Enterprises products, and the high levels of interest rates when liberalized. The second attempt at liberalization was experienced in the 1980s, following the 1978 crisis, with the impositions of the IMF and the World Bank. However, liberalization initiatives transferred to the economy, which could not get out of the crisis, created a currency crisis in Turkey in 1982 and 1983.
The economic depression experienced towards the end of the 1970s, internal problems, the Cyprus Operation, high increases in oil prices, black market, queues, political instability, devaluations, overvaluation of the exchange rate, escalation of terrorism, etc. High increases have occurred in Turkey's import figures due to these factors. The development strategy, which aims to reduce foreign dependency and domestic production, has not reached its target.
1- Türkiye’de Uygulanan Dış Ticaret Politikalarının Ekonomik Büyümeye Etkisi (Tuğba Temur-Yüksek Lisans Tezi)
2- Ecevit ve Milli Cephe Dönemi Dış Politikası (https://www.youtube.com/watch?v=nManCZuX0K8)