Turkey has experienced strong economic growth during the last 20 years. Unfortunately, much of this expansion has been driven by debt-financed infrastructure spending. This excessive debt accumulation had a major impact and created severe imbalances within the Turkish economy.
As the worldwide economic outlook has worsened amid rising inflation, the continued pandemic and geopolitical instability, the headwinds Turkey faces have only grown stronger. As a result, the country’s current economic crisis is prone to get even worse.
Infrastructure-driven growth
After a “lost decade” within the NinetiesTurkey experienced a protracted period of strong economic growth. In fact, from 2002 to 2020, the country’s GDP grew at an annual rate of 4.6%. However, this growth was not driven by its usual driver – household consumption – but by infrastructure spending and other capital expenditure. While this increased growth, it also burdened the economy with several long-term problems:
1. High and growing economic imbalances
Turkey introduced loose monetary and financial policies to stimulate its economic growth. This growth was achieved, however it was accompanied by high inflation and excessive debt. Turkey’s CPI rose to a staggering 54.4% in February 2022 and continues to rise. This has reduced consumer purchasing power and the general competitiveness of Turkish industry, not to say the worth of the Turkish lira.
Türkiye’s CPI year-on-year
2. Increased debt
Turkey’s GDP growth was fueled by excessive debt. The country’s gross non-financial debt has greater than quadrupled, rising from $211 billion in 2000 to $871 billion in 2020. In comparison, the country’s GDP grew by only 270% in US dollar terms. As a result, the economy’s total debt burden rose from 77% of GDP in 2000 to 129% in 2020.
Turkey’s non-financial sector debt as a percentage of GDP
In addition, much of this debt comes from foreign sources: the country’s total external debt is about 60% of GDP. For a rustic with a double deficit, this debt rate is unsustainable.
3. Weakness of traditional economic drivers
Turkey’s infrastructure spending hasn’t helped other sectors of its economy all that much. The country’s most important economic driver, household spending, has actually weakened over the 20 years of expansion, falling from 69% of GDP in the primary quarter of 2000 to 55% of GDP in 2020.
Gross fixed capital formation and private consumption expenditure of Türkiye as a percentage of GDP
The share of net exports in GDP also stagnated. This has made the economy much more depending on infrastructure spending and rising debt.
An unsustainable path
Turkey’s economic model depends upon the supply of easy credit, whatever the country’s ability to repay it. Given the deteriorating global outlook and worsening domestic situation, this credit is not going to be as available. And that can only further distort the Turkish economy.
With the rapid decline of the lira, the country’s external debt is already becoming dearer, and given restrictive monetary policies within the United States and Europe, it’s becoming increasingly difficult to acquire credit.
Türkiye’s current account balance as a percentage of GDP
Rampant inflation, high debt burdens and high unemployment mean that the Turkish economy is facing significant instability. Meanwhile, consumer spending is falling and the country’s economic competitiveness appears to be declining because it trades less with developed markets and more with emerging markets.
Continuing the present debt-fueled growth path will only exacerbate Turkey’s problems: the truth is, it may lead to a deeper recession or, even worse, prolonged stagflation. External events resembling rising inflation and the Russia-Ukraine war will further slow Turkish growth.
Previous economic crises in Turkey in 1958 and within the Seventies and Nineties followed an analogous pattern of excessive inflation, increased current account deficits and a collapsing lira. History suggests caution is warranted.
The government doesn’t help
The Turkish government’s economic policy doesn’t indicate a obligatory course correction. The country’s leaders seem like prioritizing political goals over economic stability. Furthermore, the dearth of independent institutions makes it difficult to implement balanced policies.
A cautionary tale?
Turkey’s economic growth path offers a lesson for other developing countries that depend on debt for growth: excessive reliance on debt creates economic distortions that may have profound consequences.
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Photo credit: ©Getty Images/Sami Sert
