NEWS ARTICLE        10/03/2023

2022 was yet another year lost for the Turkish economy

Since 2013, the Turkish government has managed to slowly but surely degrade the Turkish economy which had achieved so much in the previous decade. The government’s adoption of divisive political strategies which have alienated Turkey’s secular, liberal, and more educated classes, its spending of so much time, energy and resources on geo-political confrontations, and its preference for grandiose and expensive infrastructural investment projects to gain prestige rather than encourage investments in industry and agriculture, have all contributed towards a lack of effort to plan and implement sound long-term economic policies. This situation has been exasperated by a number of events which have had a direct adverse impact on the Turkish economy. These include among others the sanctions imposed by the Russians in 2015 as a result of the shooting down of a Russian fighter, the failed coup attempt of July 2016, the influx of millions of Syrians fleeing the Syrian civil war, the financial crisis in August 2018, the Covid-19 pandemic in 2020, and the financial crisis of December 2021.


The Turkish government, faced by a weakening economy, instead of pursuing sound monetary and fiscal policies which would ensure a steady recovery, went for broke by implementing short-term high growth policies to boost growth at all costs to keep its political base happy. In this regard, despite increasing inflation, the government insisted on reducing interest rates in the face of orthodox monetary policies to the contrary. This resulted in the collapse of the Turkish lira in December 2021. In order to stabilise the Turkish lira, the government introduced its F/X-protected Turkish lira deposits, a financial instrument which was an effective stop-gap policy despite the long-term financial risks involved. Many other stop-gap monetary policies and capital-control measures have been introduced as volatile situations arose.  


There were four reductions in the Central bank’s policy interest rate from 19% to 14% in the months of September 2021 thru to December 2021 which triggered the collapse of the Turkish lira in December 2021. The Central Bank refrained from further reductions until August 2022 when it felt in a better position to prop-up the Turkish lira should there be a repetition of the pressure incurred at the end of 2021. The policy rate was reduced from 14% to 9% in the months of August 2022 thru to November 2022 with no subsequent pressure on the Turkish lira. The reason for this was a combination of sales of F/X reserves, the guarantee provided by the F/X-protected Turkish lira deposits instrument, and the implementation of capital controls on corporates and banks. The wide gulf between the Central Bank’s policy rate of 9% and the real inflation rate surpassing 100% did not as would normally have been expected set off any alarm side-effects because of the government’s stricter control over F/X movement. 


The Turkish lira devalued 40.3% against the US dollar, following a devaluation of 79.5% in 2021. The fall in 2022 would have been higher if not for the government’s efforts to prop-up the Turkish lira through foreign currency sales and various capital controls. With the general elections to be held in mid-2023 in mind, the government was determined to work towards bringing inflation under control, and to this end it decided to concentrate its efforts on supporting the Turkish lira, since this would at least help stabilise the cost of imports, an important contributor towards overall inflation. In January 2022, the government mandated exporters to sell 25% of their foreign currency revenues to the Central Bank. This was increased to 40% in April 2022. In June 2022, Turkey’s Banking Regulation and Supervision Agency (BDDK) banned banks from issuing lira loans to companies holding foreign exchange worth more than TL 15 million (USD 910,000) if that amount exceeds 10% of their total assets or annual sale revenues. Though Turkey’s gross reserves were some USD 128 billion at the end of 2022, the country’s net reserves remained below USD 60 throughout 2022. Faced with a shortfall in foreign currency, despite the record F/X revenue generated by the tourism sector in 2022, the Turkish government has made up for the shortfall in foreign currency through cash loan infusions and swap agreements obtained from Saudi Arabia, UAE, Qatar and Russia.


The problem with the policy of propping-up the Turkish lira was that it would become overvalued in time with a detrimental effect on exports. The Turkish lira devalued by only 5% in the second half of 2022, whereas real annual inflation was over 100% throughout 2022. Faced with increasing costs, exporters have started to struggle in particular as their foreign exchange revenue has failed to keep up. This development has come as a serious disappointment since exports had reached record levels in 2022. Should this policy continue, a large fall in export revenue is expected in 2023. The overvaluation of the Turkish lira has also encouraged imports, the increase of which out outpaced the increase in exports in 2022. For the total year of 2022, the trade deficit was USD 109,514 million, 137% higher than the figure for the previous year. Exports totalled USD 254,197 million and imports totalled USD 363,711 million in 2022. The export figure was a 12.9% increase and the import figure a 34% increase on the figures for the previous year.


The increase in the foreign trade deficit in 2022 has also had a knock-on negative effect on Turkey’s current account balance, for which a deficit of USD 48,395 million was recorded in 2022 compared with a deficit of USD 7,232 million in the previous year of 2021, an increase of 569.2%. Turkey’s current account deficit is expected to increase further in 2023 should current monetary policies continue.


A success story in Turkey has been tourism. In 2022, Turkey’s tourism revenue increased by 53.4% to USD 46,285 million, and the number of visitors increased by 75% to 51,369,026. Of the 51,369,026 visitors leaving Turkey in 2022, 44,341,522 (86.3%) visitors were foreign and 7,027,504 (13.7%) visitors were Turkish citizens living abroad. The revenue of USD 46,285 million for 2022 has surpassed the total year revenue figure of USD 38,930 million for 2019.

Turkish tourism, which broke all records in 2019 and was preparing to attract even more tourists in the years to come, was unfortunately confronted from March 2020 with the coronavirus pandemic which had inhibited international travel. However, following the introduction of its vaccination programme, Turkey opened up to foreign tourists at the beginning of the 2021 Summer season. The number of foreign tourists visiting Turkey has indeed improved since June 2021, and in 2022 achieved 2019 levels.


Again with an eye on its political base, the government took advantage of its growing autocratic nature by ensuring that a rosy picture of economic developments in Turkey was always presented through its control of the majority of media outlets. The Turkish Central Bank lost any credence of independence through the appointment of governors suppliant to the President. Furthermore, Turkey’s statistical institute TurkStat came under the close supervision of the Ministry of Treasury and Finance, and top officials at the institution were replaced by government yes-men. As a result, the annual inflation rate, the unemployment rate, and indices such as the consumer confidence, economic confidence and industrial production indices are no longer considered reliable indicators in many circles. Continual revisions by TurkStat to the calculation methods of Turkey’s economic statistics in recent years have also not helped in creating confidence in their accuracy and reliability. The result has been that it has become very difficult to obtain reliable and detailed information about the state of the Turkish economy. TÜSİAD, Turkey’s largest industrialist  association, and businessmen have been reluctant to discuss shortcomings in the economy or criticise government economic and monetary policies for fear of attracting the wrath of the government.


Turkey’s growth rate figures have also been brought into question. Growth of 11.4% was recorded in 2021, a very high figure considering that Turkey like the rest of the world only began to recover that year from the Covid-19 pandemic. Turkey’s growth rate for 2022 was 5.6%, again a figure considered as high in light of continued high inflation and a weakening Turkish lira that year. Much of the growth recorded over the last ten years has largely consisted of high government expenditure and consumer consumption, with a lack of investment in the industrial and agricultural sectors in particular. 


The official average inflation rate as prepared by TurkStat for the year 2022 is 72.31%, and the annual inflation rate as of December 2022 is 64.27%. This compares with 19.60% and 36.08% for 2021 respectively. The lack of credibility in these official figures gave arise to the preparation of Turkey’s monthly inflation figures by the University based ENAG Inflation Research Group, according to which Turkey’s annual inflation rate had surpassed 175% by mid-2022.  


The index figures prepared by TurkStat also cast some doubt as to their accuracy. The Industrial Production Index decreased 0.2% in 2022 compared with the previous year, whereas it had increased 14.4% in 2021. The Economic Confidence Index remained the same at 97.6 points at 2022 yearend, compared with 2021 yearend. The Consumer Confidence Index increased to 75.6 points as of 2022 yearend from 68.9 points as of 2021 yearend.


The annual unemployment rate as prepared by TurkStat for 2022 was 10.4%. The rate was recorded as 10.3%  for December 2022. This compares with the annual unemployment rate for 2021 which was given as 12% and the rate recorded as for December 2021 as 11.2%. There has been much criticism of the accuracy of these unemployment rates. 


Turkey’s fiscal status is in a much sounder position. According to figures prepared by the Turkish Treasury, the budget deficit was TL 139,065 million in 2022, which was 50% less than the budget forecast for the year, and compares with a budget deficit of TL 192,244 in 2021. However, there is every indication that the budget deficit will greatly increase in 2023 due to the elections in May 2023 and the country’s fast deteriorating economic situation.


Turkey’s foreign debt is in a more critical situation. Despite determined efforts to reduce the private sector’s foreign debt over the last few years, it still remains high at USD 160.1 billion as of 2022 yearend. This figure is 4.2% lower than the balance as of 2021 yearend. Turkey’s central administration gross debt stock is TL 4,032.2 billion as of 2022 yearend. This 46.8% increase on the previous yearend figure of TL 2,747.7 billion is not alarming when one takes into account the high inflation incurred in 2022.


Turkey’s net international investment position is minus USD 279.1 billion as of 2022 yearend, an increase of 10.4% on the figure of minus USD 252.7 billion recorded as of 2021 yearend. Turkey’s gross external debt stock is USD 459 billion as of 2022 yearend, compared with USD 444.1 billion in 2021, an increase of 3.4%. Turkey’s short-term external debt stock is USD 145.6 billion as of 2022 yearend, an increase of 22.1% on the figure as of 2021 yearend.


The lack of a sound and credible economic policy based on long-term planning to which the government was committed has had serious consequences for the Turkish economy. Political considerations over the last ten years have invariably taken priority over economic considerations such that economic policy has taken the form of stop-gap attempts to meet politically generated economic crises. Much time and resources have been wasted and 2022 has been yet another year of lost opportunities.


Turkey’s net minimum wage has been raised 49% to TL 17,002 (USD 577) as of 01.01.2024       Migration communication helpline 157 available for foreigners in Turkey       Read our homepage articles on developments in the Turkish economy       Turkey’s official annual inflation rate increases marginally to 64.86% in January 2024       Turkey’s official unemployment rate is 8.8% in December 2023       Read our BUSINESS section for latest sectoral and corporate news       Turkey’s population is 85,372,377 as of 2023 yearend       No. of foreigners visiting Turkey in 2023 increases 10.4% to 49.2 million       Turkey’s private sector foreign debt is USD 164.4 billion as of yearend 2023       Turkey’s economy grew 5.5% in 2022       FDI to Turkey is USD 10.6 billion in 2023       Turkey’s current account deficit is USD 45.2 billion in 2023