The Turkish Economy Is Facing A Neverending Crisis: Here's Why


Turkey, a country with a population of just 8.2 crore people, has abundant natural resources. It is one of the most developed countries in the Mediterranean region and Middle-East. It has the 17th largest GDP in the world. As a country, Turkey prospered far better in the 21st Century than its neighbours. However, tables turned for Turkey after 2016. 

The Turkish Lira(TRY/₺) recently fell 15% against the dollar after Turkish President  Recep Tayyip Erdogan fired its central bank chief for “increasing interest rates,” something the President was totally opposed to. Earlier, Turkey had faced an economic and political crisis post-2016, a military coup, a financial crisis followed by the aftermath of the COVID-19 pandemic. In this piece, we summarize Turkey’s political and economic situation and what it means for the global markets.

Military Coup and The Debt Crisis

Turkey’s relationship with its current president has been pretty shaky since he was elected to office in 2014. A fraction of its military revolted against the Erdogan Government in 2016. It failed, and all involved were tried in court and sent to prison. Some were against the coup; some secretly supported it. Essentially, there was unrest in the country. The tension was because of social, economic, and political reasons put together. Turkey used to be one of the more economically and socially ‘liberal’ countries than its neighbors Syria, Iraq, Iran, and Armenia. President Erdogan was following a stricter and more ‘religious’ approach to governance

Meanwhile, Turkey was grappling with a private debt crisis in 2018. After the 2008 economic crisis, there was a lot of money flowing in the market since the United States had lowered interest rates and spurred the economy with a stimulus package. The emerging economies like India and Turkey benefited from it and ended up receiving tons of foreign investment. Investors preferred investing in emerging markets since they got a better rate of return than the US markets. Most of the investment and growth in Turkey were fuelled by debt. People borrowed money to set up businesses hoping they would flourish

Now there are three catches to the economic crisis,:

Catch #1: The US government had started rolling back its stimulus program and jacked up interest rates back at home. The foreign investors withdrew money from emerging markets to put them in domestic ones. This is known as Taper Tantrum. You can read more about Taper Tantrum over here.  

Catch #2: Remember, the growth in Turkey post-2008 was fuelled by foreign debt. Suddenly, the development stopped, and there was no money to pay back the foreign debt. The amount of Non-Performing Assets increased. There was a large current account deficit for Turkey. Meaning, Turkey was paying more for its imports than it was getting from its exports.

Catch #3: While foreign investment was coming in, inflation went up. Naturally, if people have more money in their hands, then they are likely to spend more. This would increase the overall price of goods due to increased demand. As inflation went up, the purchasing power of the Turkish Lira went down. This affected the ability of businesses to pay back foreign debt which was in a powerful currency denomination like the Euro or Dollar. 

In addition to this, there was political tension with Russia after it shot down a Russian fighter plane. Then there was a civil war in the neighbouring country Syria. The United States had jacked up duties on metal imports from Turkey. This kicked the value of Lira FURTHER DOWN. The price of the Lira has been pretty volatile since then.  

Current Scenario

President Erdogan follows a very ‘orthodox’ interest rate policy. He is against high interest rates as he believes that the concept of interest is against Islam and that lowering interest rates will fuel economic growth. He isn’t totally wrong. However, decreasing the interest rates also increases inflation, impacting the purchasing power of the Turkish Lira and its stance against the Dollar in the global markets. What did Erdogan want? Simple, to keep Interest rates as low as possible.

As stated by Erdogan in a public forum, he believes that increasing interest rates will increase inflation. This goes against commonly accepted basic economics.

Erdogan has an authoritarian style of governance. He doesn’t like anybody going against his ideals. Naci Agbal, the former central bank chief, successfully curbed inflation by following specific monetary measures and increasing interest rates. Naci Agbal’s appointment as central bank chief proved to be Golden for the Turkish Lira. Turkish Lira grew ~17% since his appointment in November 2020. Inflation came down, stock markets went up, and public sentiment was bullish.

However, Naci Agbal was going directly against the orders of Erdogan. He was eventually taken off his position by Erdogan which didn’t go down well with the market. Eventually, the Lira against the US Dollar fell back to where it came from. It tanked 15% as investors that were bullish on Lira were now selling it and buying Dollars and so the economic crisis continues. 

Does This Affect India?

India and Turkey had a bilateral trade of ~$9 billion as of 2019. Turkey imported goods and services worth ~$7.5 million from India. It mainly imported petroleum oils and oils obtained from bituminous minerals. India doesn’t extract or import crude oil but is a major exporter of processed/finished petroleum products, a portion of which it exports to Turkey as well. As Turkey’s purchasing power goes down, it might import less from India. That however keeps the value of the Indian rupee and the stock markets untouched. 

However, there is another aspect to this. Turkey and India both count as ‘Emerging Economies’. A spillover effect can impact other economies. As investors sell the Lira for the Dollar, the Indian Rupee might get swept away in the process. This can be an impact in the near future in case the situation gets worse. Lately, India hasn’t had the best of political and diplomatic relations with Turkey. A vibrant economic synergy between the two countries can be created provided the countries put aside their political differences. 

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