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.
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 arrested on 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%. As of July 2026 the YoY inflation stood on 31.75%.
More recently, political turmoil has further complicated the economic recovery. A series of anti-democratic 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.
Current account deficit and foreign-currency debt
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.
Government's 'action plans' to confront the crisis
In 2018, the finance minister of the Turkish government, Albayrak unveiled a new economic program to stave off the 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%.
Presidential interference with the central bank
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 March 2021, Erdoğan fired Naci Ağbal, the governeor of the central bank. This led to shock in financial markets according to the Christian Science Monitor. In his stead, Erdoğan appointed a newspaper columnist who according to the Monitor agrees with Erdoğan's economic views.
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.
Consequences in Turkey
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."
Suicides
In January 2018, a worker self-immolated in front of Parliament..
In February 2020, Adem Yarıcı, 42, who was unemployed for a long time, burnt himself infront of the office of the governor of Hatay, screaming "my children are hungry" on 7 February 2020; he later died. The Hatay governorship stated that he had received assistance from social services, and suffered from psychological problems.
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.