The Revere

By: Olivia Iragorri-Hunt

Turkey’s financial crisis caused by foreign currency debt, inflation, and political interference, with recent reforms offers hopeful signs of recovery.

Turkey’s financial crisis, also referred to as the “Great Turkish Depression,” is a prolonged recession that began in 2018. Once a promising emerging market, whose GDP more than tripled between 2001 and 2013, Turkey’s rapid growth in the early 2000s declined into high inflation, currency depreciation, and significant foreign capital withdrawal. Under the increasingly autocratic leadership of Turkish President Recep Tayyip Erdoğan and his Justice and Development Party (AKP), “almost no branch of government or sector of the economy is fully independent of the executive branch,” according to the Turkish Democracy Project. Many Turks complain that President Erdoğan is slowly eroding the principles of Mustafa Kemal Atatürk’s republic, established as the first completely secular state in the Islamic world in 1924, as Erdoğan progressively imposes religious values. This crisis arose due to a combination of unconventional economic policies, political interference, and a heavy dependence on foreign capital. Despite being the world’s 16th largest economy, with a GDP of $1.44 trillion as of August 2025, Turkey has struggled to maintain financial stability. The Turkish lira’s depreciation, large foreign currency debts, and high current account deficit obstruct the economy’s path to recovery.

A significant cause of Turkey’s financial collapse is rooted in its large current account deficit and foreign currency debt. Since the 2010s, Turkish corporations have borrowed extensively in U.S. dollars and euros, rendering them highly vulnerable to the depreciation of the lira. In 2021, the lira dropped 44%, reaching a record low of ₺18 against the dollar in December. The drop made it very difficult and expensive to pay back the foreign currency debts. Turkey’s current account deficit, which reached $47.1 billion in 2017, further escalated the crisis. Current account deficits occur when a country imports more goods and services than it exports, which can also lead to a depreciation of the country’s currency value. More imports create increased demand for foreign currency. In contrast, fewer exports, along with lower foreign investor confidence, result in less foreign currency inflow. Combined, these factors lead to higher exchange rates, further depreciating the currency. 

While inflation was rising, President Erdoğan decided to cut interest rates, part of a series of unorthodox economic policies dubbed “Erdoğanomics,” a clear sign of the beginnings of his interference. Erdoğan, believing that interest rates were the cause of inflation, relied heavily on the Central Bank of Turkey. Lower interest rates result in lower borrowing costs, which boost spending and investment, ultimately accelerating inflation. On the other hand, higher interest rates discourage spending, thereby slowing inflation. Under the Muslim belief that interest rates are unjust and exploitative, Erdoğan prevented the Central Bank from raising interest rates as needed to control inflation. This was aimed at generating short-term economic growth in an effort to promote consumption and investment. To achieve this, Erdoğan dismissed experienced Central Bank governors and appointed a board of loyalists who complied with his wishes.

After a series of economic mismanagement issues caused by his interference, President Erdoğan was forced to finally return to orthodox ways. Erdoğan spent a significant amount of money to secure his reelection, deepening the issue and leading to inflation soaring over 80% in 2024. A series of expansionary fiscal policies, intended to boost public support and create short-term economic optimism, increased households’ spending power, leading to a surge in consumption and worsening the situation. These policies included costly pension funds, subsidized housing projects, and higher minimum wages, which passed the business costs onto the consumer and raised prices. These measures also worsened government budget deficits, in addition to exacerbating inflation. Once it rose past 85% and the lira continued to collapse, he appointed Mehmet Şimşek as Minister of Treasury, alongside Hafize Gaye Erkan, who became Governor of the Central Bank in June 2023. Şimşek had previously served as Minister of State for the Economy and Deputy Prime Minister in the AKP and was well-regarded by international markets. However, the arrest on corruption charges of Istanbul Mayor Ekrem İmamoğlu, the opposing candidate for the 2028 elections, on 19 March 2025, was seen by markets as politically motivated. On that day, the lira dropped to ₺42 to $1, a 10% drop within a matter of hours. The Central Bank reacted by raising interest rates from 42.5% to 46% in April to control capital flight. This incident highlighted the vulnerability of the Turkish economy in the face of political shocks, raising concerns about the durability of economic stabilization. With Erdoğan’s increasing autocracy, as suppression of opposition and centralized decision-making become more prevalent, lie threats of political unrest, dissuading foreign investors who are uneasy about the possibility of further shocks. Argentina experienced similar cycles in the late 20th century, where populist leaders expanded government spending and controlled prices to increase their popularity. President Juan Perón of Argentina’s increased wages and government spending on welfare programs were countered by his authoritarian tendencies, including censorship of the press and elimination of opposition, which ultimately led to high inflation and deficits resulting from printing money.

While concerns persist about the future of the Turkish economy, measures are being taken to drive its recovery. Şimşek and Erkan supported the return to strict monetary and fiscal policies. Working with the Central Bank, they raised interest rates from 8.5% in May 2023 to 50% in March 2024, imposed a ban on short selling, and, in an effort to restore confidence in the Turkish market, organized several meetings with foreign investors. The current account deficit has been running at less than 4% of GDP over the last three months, according to JPMorgan analysts. Inflation has been steadily decreasing, from 49.38% in September 2024 to 33.29% in September 2025, although it is still high by global standards. Inflation is projected at around 30% in 2025. Economic stabilization efforts continue. Tourism alone generated $61.1 billion in revenue in 2024, and an increase in private consumption is predicted to drive GDP growth to 3% by the end of 2025. Inflation is expected to continue falling, with the Central Bank predicting rates of 24% by the end of 2025, 12% in 2026, and 8% in 2027. A weakening U.S. dollar slowly resolves the issue of foreign currency debt, and rising interest rates following the arrest indicate an almost complete return to orthodox economic policies. However, political instability remains a notable concern. Turkey’s recovery depends not only on strict economic policy but also on restoring institutional independence and political stability. Turkey’s economic collapse and recession can serve as a warning for how political interference can threaten even the most promising markets and economies.