Turkey’s Financial Crisis

Turkey has been undergoing a financial crisis in recent years, marked by high inflation, a depreciating currency, and a growing debt burden. The primary factor behind the crisis is the country’s high current account deficit, which is driven by a large trade deficit and a reliance on short-term foreign borrowing. The Turkish Lira has depreciated by over 75% against the US dollar since 2019, leading to a significant increase in the cost of imported goods and contributing to high inflation. In November 2022, the inflation rate reached 11.9%, which is well above the central bank’s target of 5%.

The high current account deficit reached $47.1 billion in 2022, representing 3.4% of GDP, and Turkey’s large external debt burden, which stood at $453.6 billion in October 2022, equivalent to 30% of GDP, has added to the crisis. Most of the debt is short-term and denominated in foreign currencies, making it vulnerable to currency fluctuations. The leadership’s lack of action to address these issues has resulted in a decrease in foreign investment and a loss of investor confidence, further exacerbating the crisis.

The Central Bank of the Republic of Turkey has attempted to stabilize the economy by raising interest rates, but high inflation and a depreciating currency have made it challenging. The bank has also attempted to support the lira by selling foreign currency reserves, but the impact has been limited. The leadership’s economic policies, which focus on short-term gains rather than long-term sustainability, have also contributed to the crisis. For example, the emphasis on large infrastructure projects and increased government spending has led to a widening budget deficit and increased government debt.

There is concern that the crisis could spread to other countries, particularly those in the European Union with close economic ties to Turkey. As Turkey’s largest trading partner, a financial crisis in the country could significantly impact the economies of EU member states.
In conclusion, Turkey’s financial crisis is characterized by high inflation, a depreciating currency, and a rising debt burden, caused by a high current account deficit and a reliance on short-term foreign borrowing. The Central Bank of the Republic of Turkey is trying to stabilize the economy, but high inflation and a depreciating currency are making it difficult. The crisis could have a significant impact on the economies of EU member states with close economic ties to Turkey.