Turkey’s Economy is collapsing

The Turkish economy is facing an unprecedented crisis, as noted, inflation has skyrocketed to record levels, with a huge deviation from forecasts. This unfavorable situation has caused a wave of business closures and intense social and economic instability in the country, with Recep Tayyip Erdogan being called upon to take immediate measures. In particular, after the change in economic policy in June 2023 in Turkey, a large gap was created between the inflation target set in the first Medium-Term Program and the actual data. Turkish Finance Minister Şimşek, according to the pro-government newspaper “Yeni Safak”, promised to reduce inflation in 2026 to 8.5%. However, even with the most optimistic forecast, inflation in 2026 will be 29%. That is, there was a 350% gap between the target and reality. This is a world record. The high interest rate policy implemented by Finance and Treasury Minister Mehmet Şimşek failed to bring inflation under control. At no time in history and in no country has there been such a large gap in inflation forecasts. According to the Medium-Term Program announced in September 2023, inflation would decrease to 65% in 2023, 33% in 2024, 15% in 2025 and 8.5% in 2026. In order to achieve these targets, interest rates were increased from 8.5% to 50%. High interest rates, which have been maintained in the 40%-50% range for two years, have put pressure on production, investment and exports, but have failed to curb high inflation. The Consumer Price Index (CPI) stood at 64.77% in 2023. By the end of 2024, inflation was recorded at 44.38%, while in 2025 it decreased to only 30.89%. For this year, it is expected to move in the 25%-30% range. These figures show that the economic policy, the cost of which was paid heavily by producers, traders, professionals, farmers and citizens, has failed to achieve the inflation targets. On the contrary, as the program continues, the difference between targets and actual figures increases every year. Last year, inflation was double the target, while this year it is expected to reach almost triple the target.

Inflation has fallen from 75%

Although inflation closed close to the Medium-Term Program target in 2023, it continued to rise thereafter. The fact that inflation reached 75.45% in May 2024, one of the highest levels in recent years, was linked to the statement by Finance and Treasury Minister Mehmet Şimşek that “the exchange rate was kept under pressure.” This statement, made after the publication of the Medium-Term Program 2024-2026 in the Turkish Government Gazette on September 6, 2023, remains etched in memory. From December 2021 to about May 2023, the exchange rate was maintained at a certain level. They left the exchange rate free. Of course there is an effect of the exchange rate. It is not right to talk about rational policies and at the same time intervene in the exchange rate.

Factories are closing

When the May 2023 elections were held, interest rates on commercial loans, also known as “investment loans,” were around 15%. After the change in interest rate policy, the cost of investment loans reached almost 70%. On June 2, 2023, the average commercial loan interest rate of the banking sector was 14.95%, while on April 5, 2024, it reached its highest level of 67.55%. Although it decreased somewhat later, it still stands at around 54%. Şimşek’s policy of high positive real interest rates has failed to reduce inflation, while it has severely affected the real sector. Thousands of businesses have declared bankruptcy, while thousands of factories have either closed or reduced their production to a minimum. The profitability of the manufacturing sector is rapidly declining, while funds that would have been directed to investments are being placed at interest rates due to the high cost of borrowing. Demand for electricity in the manufacturing sector has fallen significantly, as a result of which electricity prices in the spot market have collapsed. In fact, during last Ramadan, at certain night hours, spot prices for wind energy fell to zero.

Current account deficit and the dollar

In 2023, the total current account deficit was $45.4 billion, while in 2024 it decreased to $10 billion, mainly thanks to the intense efforts of the Ministry of Commerce. However, due to high interest rates and a misguided exchange rate policy, the deficit increased to $25.2 billion in 2025 and showed an explosive increase in the first quarter of 2026. In the first quarter of the year, a deficit of $20 billion was created, the highest first quarter to date. If this trend continues, the deficit for 2026 is expected to exceed $65 billion. In the last three years, the value of the Turkish lira against foreign currencies has decreased significantly.

• In May 2023, the dollar was 20 liras and increased by 125% to reach 45 liras.
• During the same period, the euro rose by 145% from 21.5 pounds to 52.75 pounds.

The fact that no tax is imposed on dollar speculators, despite being required by law, contributed to the depreciation of the pound against foreign currencies.