Key Points:
- Turkey’s economic growth has been largely driven by debt-fueled infrastructure spending.
- This excessive debt accumulation has led to significant imbalances in Turkey’s economy.
- The country is facing headwinds from a deteriorating global economic outlook.
- Turkey’s current economic crisis is expected to intensify further.
- The reliance on easy credit and debt is unsustainable.
- The rapid decline in the Turkish lira and the tightening of credit availability will further warp the economy.
- Rampant inflation, a heavy debt load, and high unemployment pose significant challenges to the Turkish economy.
- The Turkish government’s economic policies do not indicate a necessary course correction.
- Other developing nations should take note of the consequences of relying too heavily on leverage for economic growth.
Turkey has experienced strong economic growth in the past two decades, largely driven by debt-fueled infrastructure spending. However, this rapid expansion has come at a cost, creating severe imbalances in the economy. These imbalances have been exacerbated by a deteriorating global economic outlook, including rising inflation, the ongoing pandemic, and geopolitical instability, which have further intensified Turkey’s current economic crisis.
During the “lost decade” of the 1990s, Turkey faced economic challenges. However, the country embarked on a period of robust economic growth, with its GDP expanding at an annual rate of 4.6% from 2002 to 2020. This growth was primarily fueled by infrastructure spending and other capital expenditures, rather than traditional drivers such as household consumption. While this boosted growth, it also resulted in several long-term problems.
Firstly, Turkey’s loose monetary and fiscal policies to fuel economic expansion led to high inflation and excessive debt. The country’s consumer price index (CPI) rose to an alarming 54.4% in February 2022, reducing consumer purchasing power and the competitiveness of Turkish industry. Additionally, Turkey’s debt levels have surged, with the gross non-financial-sector debt quadrupling from $211 billion in 2000 to $871 billion in 2020. This has increased the total debt burden of the economy to 129% of GDP in 2020.
Furthermore, a significant portion of Turkey’s debt originates from foreign sources, with the country’s total external debt accounting for approximately 60% of GDP. This high level of external debt is unsustainable for a country running on twin deficits.
Despite the focus on infrastructure spending, Turkey’s primary economic driver, household spending, has actually weakened during the expansion period. It fell from 69% of GDP in the first quarter of 2000 to 55% of GDP in 2020. Net exports have also stagnated, making the economy more dependent on infrastructure spending and debt-driven growth.
However, Turkey’s economic model of relying on easy credit is now facing challenges. The rapid decline in the Turkish lira has made the country’s external debt more expensive. Additionally, monetary tightening in the United States and Europe will make credit harder to come by. These factors, coupled with rampant inflation, a heavy debt load, and high unemployment, are causing considerable instability in the Turkish economy.
Despite the challenges, the Turkish government’s economic policies do not indicate a necessary course correction. Political priorities seem to be prioritized over economic stability, and a lack of independent institutions makes achieving balanced policies difficult.
Turkey’s economic growth path serves as a cautionary tale for other developing nations that rely heavily on debt for growth. An overreliance on leverage can lead to economic distortions and profound consequences. It is important for these countries to learn from Turkey’s experience and avoid the pitfalls of excessive debt accumulation.
