In May 2001, the International Monetary Fund (IMF) agreed to lead $8 billion to Turkey to help the country stabilize its economy after losing the value of its currency. Turkey became a member of the IMF in 1958.
To support state industries and finance subsidies, Turkey issued significant amounts of government debt. To limit the amount of debt, the government expanded the money supply to finance spending. The result was rampant inflation and high interest rates. During the 1990s, inflation averaged over 80 percent a year while real interest rates rose to more than 50 percent on a number of occasions. Despite this the Turkish economy continued to grow at a healthy pace of 6 percent annually in real terms, a remarkable achievement.
By late 1990s, government debt had risen to 60% of gross domestic product, government borrowing was leaving little capital for private enterprises and the cost of financing government debt was out of control. Realizing that it needed to reform its economy, the Turkish government sat down with the IMF in late 1999 to work out a recovery program, adopted in January 2000.
Initially the program seemed to be working. Inflation fell to 35% in 2000, while the economy grew by 6%. By the end of 2000, however, the program was in trouble burdened with nonperforming loans, many Turkish banks faced default and had been taken into public ownership by the government.
When a criminal fraud investigation uncovered evidence that many of banks had been pressured by politicians into providing loans at below-market interest rates. Therefore, foreign investors pull their money out of Turkey making the stock market into tailspin and put pressure on the Turkish currency, lira.