Turkey, a country straddling Europe and Asia, has long been a key emerging market. But in recent years, it has made global financial headlines not for growth—but for surging inflation and a rapidly devaluing currency.
In this blog, we break down what caused Turkey’s inflation crisis, how it affected everyday life and foreign investment, and what lessons other nations can draw from it.
What Triggered the Crisis?
Since 2018, Turkey has been battling inflation rates that at times crossed 85%, one of the highest in the world. The main causes include:
- Unorthodox monetary policy: President Erdoğan repeatedly slashed interest rates even as inflation soared—contrary to standard economic practice.
- Currency depreciation: The Turkish lira lost over 80% of its value against the dollar in just five years.
- External debt & current account deficit: Heavy reliance on foreign borrowing and imports made the economy vulnerable.
Impact on Citizens and Markets
- Soaring cost of living: Basic items like food, rent, and utilities became unaffordable for many.
- Erosion of savings: People watched their lira-denominated savings lose value almost overnight.
- Investor flight: Foreign investors pulled back due to policy uncertainty and currency volatility.
Government Response
- Introduction of currency-protected savings schemes
- Efforts to stabilize the lira via backdoor interventions
- Increased ties with Gulf countries and Russia for trade and investment
Still, confidence in the central bank’s independence remains low.
Lessons for Other Economies
- Central bank independence is critical for managing inflation effectively.
- Transparent, predictable policies attract foreign investors; uncertainty does the opposite.
- Over-reliance on foreign debt and imports can quickly spiral into crisis when global conditions tighten.
The Road Ahead
Turkey’s new economic leadership (as of mid-2023) has begun shifting back to more orthodox policies, including raising interest rates. While this may slow the economy in the short term, it’s a necessary step to restore credibility and stabilize financial markets.
Final Thoughts
Turkey’s inflation crisis is a cautionary tale of how ignoring basic economic principles can lead to financial instability. For emerging economies across the globe, the message is clear: sustainable growth requires sound monetary policy, fiscal discipline, and strong institutions.