Turkish economic crisis (2018–current)

The Turkish economic crisis (Turkish: Türkiye ekonomik krizi) is a financial and economic crisis in Turkey. It is characterized by the Turkish lira (TRY) plunging in value, high inflation, rising borrowing costs, and correspondingly rising loan defaults. The crisis was caused by the Turkish economy's excessive current account deficit and large amounts of private foreign-currency denominated debt, in combination with President Recep Tayyip Erdoğan's increasing authoritarianism and his unorthodox ideas about interest rate policy. Some analysts also stress the leveraging effects of the geopolitical frictions with the United States. Following the detention of American pastor Andrew Brunson, who was confined of espionage charges after the failed 2016 Turkish coup d'état attempt, the Trump administration exerted pressure towards Turkey by imposing further sanctions. The economic sanctions therefore doubled the tariffs on Turkey, as imported steel rises up to 50% and on aluminum to 20%. As a result, Turkish steel was priced out of the US market, which previously amounted to 13% of Turkey's total steel exports.
After a period of modest recovery in 2020 and early 2021 amid the COVID-19 pandemic, the Turkish lira plunged following the replacement of Central Bank chief Naci Ağbal with Şahap Kavcıoğlu, who slashed interest rates from 19% to 14%. The lira lost 44% of its value in 2021 alone. In 2023, however, Erdoğan began to follow orthodox banking methods under the guidance of Mehmet Şimşek and Hafize Gaye Erkan. The interest rate has stood at 50% since March 2024 upon the advice of Fatih Karahan, the governor of the central bank who succeeded Erkan. This contributed to the decline of inflation, since as of November 2024, inflation is at 47.09%, down from its all-time high of 83%.
More recently, political turmoil has further complicated the economic recovery. A series of anti-democractic crackdowns, including the high-profile detention of an Istanbul mayor and other opposition figures, have deepened market uncertainty and triggered sharp selloffs in equity markets. These events have prompted both domestic and international policymakers to scramble: Finance Minister Mehmet Şimşek and central bank officials have engaged in calls with international investors, while authorities have also taken measures such as banning short selling and relaxing buyback rules in an effort to stabilize the markets. Meanwhile, rating agencies and international observers warn that the ongoing political repression may derail broader reform efforts and threaten Turkey's fragile economic stabilization.
A longstanding characteristic of Turkey's economy is a low savings rate. Since Recep Tayyip Erdoğan assumed control of the government, Turkey has been running huge and growing current account deficits, $33.1 billion in 2016 and $47.3 billion in 2017, climbing to US$7.1 billion in the month of January 2018 with the rolling 12-month deficit rising to $51.6 billion, one of the largest current account deficits in the world. The economy has relied on capital inflows to fund private-sector excess, with Turkey's banks and big firms borrowing heavily, often in foreign currencies. Under these conditions, Turkey must find approximately $200 billion a year to fund its wide current account deficit and maturing debt, while being always at risk of inflows drying up; the state has gross foreign currency reserves of just $85 billion. The economic policy underlying these trends had increasingly been micro-managed by Erdoğan since the election of his Justice and Development Party (AKP) in 2002, and strongly so since 2008, with a focus on the construction industry, state-awarded contracts and stimulus measures. Although, research and development expenditure of the country (% of GDP) and the government expenditure on education (% of GDP) are nearly doubled during AKP governments, the desired outcomes could not be achieved The motive for these policies have been described as Erdoğan losing faith in Western-style capitalism since the 2008 financial crisis by the secretary general of the main Turkish business association, TUSIAD. Although not directly related in the conflict, the Turkish invasion of Afrin largely strained US-Turkish relations, and led to mass instability in Syria. This led to a global view of Turkey as an unnecessary aggressor.
Investment inflows had already been declining in the period leading up to the crisis, owing to Erdoğan instigating political disagreements with countries that were major sources of such inflows (such as Germany, France, and the Netherlands). Following the 2016 coup attempt, the government seized the assets of those it stated were involved, even if their ties to the coup were tenuous. Erdoğan has not taken seriously concerns that foreign companies investing in Turkey might be deterred by the country's political instability. Other factors include worries about the decreasing value of lira (TRY) which threatens to eat into investors' profit margins. Investment inflows have also declined because Erdoğan's increasing authoritarianism has quelled free and factual reporting by financial analysts in Turkey. Between January and May 2017, foreign portfolio investors funded $13.2 billion of Turkey's $17.5 billion current account deficit, according to the latest available data. During the same period in 2018, they plugged just $763 million of a swollen $27.3 billion deficit.
By the end of 2017, the corporate foreign-currency debt in Turkey had more than doubled since 2009, up to $214 billion after netting against their foreign-exchange assets. Turkey's gross external debt, both public and private, stood at $453.2 billion at the end of 2017. As of March 2018, $181.8 billion of external debt, public and private, was due to mature within a year. Non-resident holdings of domestic shares stood at $53.3 billion in early March and at $39.6 billion in mid-May, and non-resident holdings of domestic government bonds stood at $32.0 billion in early March and at $24.7 billion in mid-May. Overall non-residents' ownership of Turkish equities, government bonds and corporate debt has plummeted from a high of $92 billion in August 2017 to just $53 billion as of 13 July 2018.
In 2018 the finance minister of the Turkish government, Albayrak unveiled a new economic program to stave off the recent financial crisis. The three-year plan aims to "reign in inflation, spur growth and cut the current account deficit". The plan includes reduction on the government expenditures by $10 billion and suspension of the projects whose tender have not been carried out yet. The transformational phase of the plan will be focusing on value-added areas to increase the country's export volume and long-term production capacity with the goal of creating two million new jobs by 2021. The program is expected to lower economic growth substantially in the short term (from a previous forecast of 5.5% to 3.8% in 2018 and 2.3% in 2019) but with a gradual growth increase by 2021 towards 5%.
Turkey has experienced substantially higher inflation than other emerging markets. In October 2017, inflation was at 11.9%, the highest rate since July 2008. In 2018, the lira's exchange rate accelerated deterioration, reaching a level of 4.0 TRY per USD by late March, 4.5 TRY per USD by mid-May, 5.0 TRY per USD by early August and 6.0 as well as 7.0 TRY per USD by mid-August. Among economists, the accelerating loss of value was generally attributed to Recep Tayyip Erdoğan preventing the Central Bank of the Republic of Turkey from making the necessary interest rate adjustments.
Erdoğan, who said interest rates beyond his control to be "the mother and father of all evil", shared his unorthodox interest rate theories in a 14 May interview with Bloomberg and said that "the central bank can't take this independence and set aside the signals given by the president." Presidential intervention with central bank policy comes with a general perception in international investment circles of a "textbook institutional decline" in Turkey, with Erdoğan seen increasingly reliant on politicians whose main qualifications for their jobs is loyalty, at the expense of more qualified and experienced options. Erdoğan also has a long history of voicing Islamist discourse of interest-based banking as "prohibited by Islam" and "a serious dead-end". He is also on record referring to interest rate increases as "treason". Despite Erdogan's opposition, Turkey's Central Bank made sharp interest rates increases.
The Financial Times quoted leading emerging markets financial analyst Timothy Ash analyzing that "Turkey has strong banks, healthy public finances, good demographics, pro-business culture but [has been] spoiled over past four to five years by unorthodox and loose macroeconomic management." By mid-June, analysts in London suggested that with its current government, Turkey would be well advised to seek an International Monetary Fund loan even before the dwindling central bank foreign exchange reserves run out, because it would strengthen the central bank's hand against Erdoğan and help gain back investor confidence in the soundness of Turkey's economic policies.
Economist Paul Krugman described the unfolding crisis as "a classic currency-and-debt crisis, of a kind we've seen many times", adding: "At such a time, the quality of leadership suddenly matters a great deal. You need officials who understand what's happening, can devise a response and have enough credibility that markets give them the benefit of the doubt. Some emerging markets have those things, and they are riding out the turmoil fairly well. The Erdoğan regime has none of that."
In August 2023, Turkey's central bank raised interest rates by 7.5 points to 25% to tackle inflation, signaling a shift from previous policies. President Erdoğan's new economics team aims to restore policy orthodoxy and stabilize the economy. Despite the positive currency response, the lira remains near historic lows.
During the emergence of the crisis, lenders in Turkey were hit by restructuring demands of corporations unable to serve their USD or EUR denominated debt, due to the loss of value of their earnings in Turkish lira. While financial institutions had been the driver of the Istanbul stock exchange for many years, accounting for almost half its value, by mid-April they accounted for less than one-third. By late-May, lenders were facing a surge in demand from companies seeking to reorganise debt repayments. By early-July, public restructuring requests by some of the country's biggest businesses alone already totalled $20,000,000,000 with other debtors not publicly listed or large enough to require disclosures. The asset quality of Turkish banks, as well as their capital adequacy ratio, kept deteriorating throughout the crisis. By June Halk Bankası, the most vulnerable of the large lenders, had lost 63% of its US dollar value since last summer and traded at 40% of book value. However, it is hard to say that this is mainly due to the economic developments in Turkey since the valuation of Halkbank was largely affected by the rumors over the possible outcomes of the US investigation about the bank's stated help to Iran in evading US sanctions.
Banks continuously heightened interest rates for business and consumer loans and mortgage loan rates, towards 20% annually, thus curbing demand from businesses and consumers. With a corresponding growth in deposits, the gap between total deposits and total loans, which had been one of the highest in emerging markets, began to narrow. Nevertheless, this development has also led to incomplete or unoccupied housing and commercial real estate littering the outskirts of Turkey's major cities, as Erdoğan's policies had fuelled the construction sector, where many of his business allies are very active, to lead past economic growth. In March 2018, home sales fell 14% and mortgage sales declined 35% compared to a year earlier. As of May, Turkey had around 2,000,000 unsold houses, a backlog three times the size of the average annual number of new housing sales. In the first half of 2018, unsold stock of new housing kept increasing, while increases in new home prices in Turkey were lagging consumer price inflation by more than 10 percentage points.
While heavy portfolio capital outflows persisted, $883,000,000 in June, with official foreign exchange reserves declining by a $6,990,000,000 during June, the current account deficit started narrowing in June, due to the weakened exchange rate for the lira. This was perceived as a sign of getting balanced economy. Turkish Lira started recover its losses as of September 2018 and the current account deficit continued to shrink.
As a consequence of the earlier monetary policy of easy money, any newfound fragile short-term macroeconomic stability is based on higher interest rates, thus creating a recessionary effect for the Turkish economy. In mid-June, the Washington Post carried the quote from a senior financial figure in Istanbul that "years of irresponsible policies have overheated the Turkish economy. High inflation rates and current account deficits are going to prove sticky. I think we are at the end of our rope."
In January 2018, a worker burnt himself in front of parliament. Another person also burnt himself in governor's office of Hatay.
In November 2019 four siblings were found dead in an apartment in Fatih, Istanbul, having committed suicide because they were unable to pay their bills. The price of electricity increased in 2019 around 57% and youth unemployment stood around 27%. The electricity bill for the apartment had not been paid for several months.
A family of four including two children 9 and 5 years old was similarly found in Antalya. A note left behind detailed the financial difficulties the family was experiencing.
In mid-November The Guardian reported that an anonymous benefactor had paid off some debts at local grocery stores in Tuzla and left envelopes of cash on doorstops after the suicides.
AK Parti officials and media have denied that the recent deaths were caused by the rising cost of living.
The crisis has brought considerable risks of financial contagion. One aspect concerns risk to foreign lenders, where according to the Bank for International Settlements, international banks had outstanding loans of $224 billion to Turkish borrowers, including $83 billion from banks in Spain, $35 billion from banks in France, $18 billion from banks in Italy, $17 billion each from banks in the United States and in the United Kingdom, and $13 billion from banks in Germany. Another aspect concerns the situation of other emerging economies with high levels of debt denominated in USD or EUR, with respect to which Turkey may either be considered "a canary in the coalmine" or even by its crisis and the bad handling thereof increase international investors' retreat for increased perception of risk in such countries. On 31 May 2018, the Institute of Financial Research (IIF) reported that the Turkish crisis has already spread to Lebanon, Colombia and South Africa. The fall of the value of the lira has also impoverished the inhabitants in northern Syria, who use the lira for everyday transactions, and impacted the hazelnut industry hard, which is economically important in the country and produces 70% of world's hazelnuts.
On 15 August 2018, Qatar pledged to invest $15 billion in the Turkish economy making the lira rally by 6%.
On 29 November 2018, the Turkish lira hit a 4-month high in value against the US Dollar. It recovered from 7.0738 against the dollar to 5.17 on 29 November, an increase of 36.8%. Reuters also reported in a response to a poll that it expects the inflation to decrease for the November month. The reasons that were given are the positive exchanges, discounts on products and tax cuts.
From a background of a long history of promoting conspiracy theories by the Turkish government of Erdoğan and the AKP, with the emergence of the financial crisis, members of the government have stated that the crisis were not attributable to the government's policies, but rather were the conspiratorial work of shadowy foreign actors, seeking to harm Turkey and deprive President Erdoğan of support. During the major lira sell-off on 23 May 2018, Turkey's energy minister, Erdoğan's son-in-law Berat Albayrak, told the media that the recent sharp drop in the value of the lira was the result of the machinations of Turkey's enemies. On 30 May 2018, foreign minister Mevlüt Çavuşoğlu said that the plunge of the lira would have been caused by an organized campaign masterminded abroad, adding that the conspiracy would include both "the interest rate lobby" and "some Muslim countries", which he however refused to name. At an election campaign rally in Istanbul on 11 June 2018, Erdoğan said that the recently published 7.4 percent GDP growth figure for the January to March period would demonstrate victory against what he called "conspirators" whom he blamed for May's heavy falls of the Turkish lira. In August, Erdoğan started using the formula of "the world fighting an economic war against Turkey". Part of this idea likely had to do with a row with America regarding the case of U.S. citizen Andrew Brunson, which had a deleterious effect on Turkey-U.S. relations. Alongside sanctions on specific government figures, tariffs were also used by both countries to create economic pressure. Vox describes it as a "trade spat". Commentators such as Vox's Jen Kirby have pointed to the pivotal role Brunson's case plays in it.
A tariff on steel and other products was placed on Turkey by the United States. However, Sarah Sanders has described the American tariffs as related to "national defense", and thus not changeable by circumstances, noting that only the sanctions would be lifted upon the release of Brunson.
Erdogan describes these tariffs as an "economic war" against Turkey.
In retaliation, Turkey announced tariffs on US products, including the iPhone. The tariffs by Turkey cover products such as American cars, and coal. At a White House Press conference, Sanders described these as "regrettable". Sanders said that the Turkish economic trouble was part of a long-term trend that was not related to any actions America did.
On 22 August 2018, John R. Bolton, speaking to Reuters, said "the Turkish government made a big mistake in not releasing Pastor Brunson... [e]very day that goes by that mistake continues, this crisis could be over instantly if they did the right thing as a NATO ally, part of the West, and release pastor Brunson without condition." He went on to state that Turkey's membership in NATO was not as much of a major foreign policy issue for the US, but instead the American focus was on individuals that the United States said Turkey is holding for non-legitimate reasons. Bolton also expressed skepticism in regard to Qatar's attempts to infuse money in the Turkish economy. Erdogan spokesman Ibrahim Kalin, in a written statement, described these remarks as an admission that, contra Sanders, the American tariffs were, in fact, in relation to the Brunson case and proof that the US intended them to economically war against Turkey.
According to a poll from April 2018, 42 percent of Turks, and 59 percent of Erdoğan's governing AKP voters, saw the decline in the lira as a plot by foreign powers. In another poll from July, 36 percent of survey respondents said it the AKP government was most responsible for the depreciation of the Turkish lira, while 42 percent said it was foreign governments. This was said to be caused by the government's far-reaching control over the media via the fact that those respondents mostly reading alternative views in the Internet were more likely to see their own government responsible, at 47 percent, than foreign governments, at 34 percent.
On 16 May, a day after president Erdoğan had unsettled markets during his visit to London by suggesting he would curb the independence of the Central Bank of Turkey after the election, Republican People's Party (CHP) presidential candidate Muharrem İnce and İYİ Party presidential candidate Meral Akşener both vowed to ensure the independence of the central bank if elected.
In a 26 May interview on his campaign trail, CHP presidential candidate Muharrem İnce said on economic policy that "the central bank can only halt the lira's slide temporarily by raising interest rates, because it's not the case that depreciation fundamentally stems from interest rates being too high or too low. So, the central bank will intervene, but the things that really need to be done are in the political and legal areas. Turkey needs to immediately be extricated from a political situation that breeds economic uncertainty, and its economy must be handled by independent and autonomous institutions. My economic team is ready, and we have been working together for a long time."
In a nationwide survey conducted between 13 and 20 May, 45 percent saw the economy (including the steadily-dropping lira and unemployment) as the greatest challenge facing Turkey, with foreign policy at 18 percent, the justice system at 7 percent and terror and security at 5 percent.
İYİ Party presidential candidate Meral Akşener, supported by a strong economic team led by former Central Bank Governor Durmuş Yılmaz, had on 7 May presented her party's economic program, saying that "we will purchase the debts from consumer loans, credit card and overdraft accounts of 4.5 million citizens whose debts are under legal supervision of banks or consumer financing companies and whose debts have been sold to collection companies as of 30 April 2018. It is our duty to help our citizens with this condition, as the state has helped big companies in difficult situations."
On 13 June, CHP leader Kemal Kılıçdaroğlu reiterated the opposition's view that the state of emergency in place since July 2016 were an impediment to Turkey's currency, investment and economy, vowing that it be lifted within 48 hours in case of an opposition victory in the elections. İYİ Party leader and presidential candidate Akşener had made the same vow on 18 May, while CHP presidential candidate İnce had said on 30 May: "Foreign countries do not trust Turkey, thus they do not invest in our country. When Turkey becomes a country of the rule law, foreign investors will invest thus the lira will gain value." Early June, President Recep Tayyip Erdoğan had suggested in an interview that the issue of lifting the emergency rule would be discussed the elections, however asked back: "What's wrong with the state of emergency?"
In early April 2017, Peoples' Democratic Party (HDP) presidential candidate Selahattin Demirtaş, writing in a letter from prison—where he has been held without conviction since 2016, charged of inciting violence with words— saying that "the biggest problem for the youth in Turkey is corruption which has accompanied with AKP governance."
In late May 2018, Republican People's Party (CHP) deputy chair Aykut Erdoğdu called the Financial Crimes Investigation Board of Turkey (MASAK) to investigate exchange rate transactions made amid rapid decline and partial recovery in the value of the lira on 23 May, saying there was insider trading by market participants who knew of the 300 basis points interest rate hike by the Turkish central bank in advance.
In early July 2018, Turkey's Capital Markets Board (SPK) said that until the end of August share purchases on the Borsa Istanbul by people party to the relevant company's internal information, or by those close to them (insider trading), would not be subject to a stock market abuse directive. Amid a public outcry, it suspended the directive some days later, without giving a reason for the move.