2025 Turkey: Economic Difficulties and Struggles under the Financial crisis

Entering 2025, Turkey's economy is still in deep trouble and the shadow of a financial crisis is lingering. On February 7, 2025, the central bank of Turkey raised its inflation forecast for the year to 24%, 3 percentage points higher than before. While the annual inflation rate fell to 42.12% in January, the lowest in 19 months, it remains high and the cost of living remains high.

On the exchange rate front, the chronically depreciating Turkish lira has caused the price of imported goods to soar, further fueling domestic inflation. On March 7, 2025, the exchange rate of the Turkish lira against the RMB was 0.1987. In the foreign exchange market, the exchange rate of the US dollar against the Turkish lira fluctuated sharply, and on February 10, 2025, the exchange rate fell below 35.5832 Turkish lira per US dollar, which seriously affected Turkey's international trade and investment. Stock market performance has also been volatile, with the MSCI Turkey Index fluctuating sharply in 2025 and investor confidence low, constraining corporate finance and economic development.

The root cause of Turkey's financial crisis is the result of internal economic structure and external unfavorable factors. Defects in the domestic industrial structure and long-term dependence on imported energy and high-end manufacturing products have led to a serious trade deficit, which increased by 143 percent year-on-year to $51.4 billion in the first half of 2022, and foreign exchange reserves have been continuously depleted. At the same time, Turkey's inflation rate has remained high for many years, reaching a high of 85.5% in 2022, seriously weakening people's purchasing power. Moreover, Turkish President Recep Tayyip Erdogan's insistence on a low interest rate policy, contrary to traditional economic theory, has led to a sharp depreciation of the lira and massive capital flight.

From an external perspective, Turkey is geographically important, with instability in the surrounding region, such as the war in Syria, resulting in trade disruptions and unstable energy supplies. At the same time, sanctions by the United States and other Western countries, such as the steel and aluminum tariff sanctions in 2018, have also exacerbated Turkey's economic woes.

The financial crisis has dealt a heavy blow to all sectors of the Turkish economy. The manufacturing sector continues to shrink, with the purchasing managers' index rising slightly to 48.3 in February 2025, but still below the line between growth and contraction. In the automobile manufacturing industry, for example, the depreciation of the lira has led to a substantial increase in the cost of imported parts, the profit margin of enterprises has been compressed, and the market share has been seized. Tourism in the service sector has also been hit hard, with high inflation and economic instability decimating visitor numbers, with Istanbul seeing a 30% drop in visitor arrivals in 2024 compared to 2020. Agriculture is also facing difficulties, with production and marketing of agricultural products hindered, farmers' incomes reduced, and small agricultural enterprises at risk of closure.

People's lives in Turkey have been severely affected. The official unemployment rate is expected to reach 9.6% by 2025, with businesses closing down and workers losing their jobs. The price of bread has risen by 50 percent in the past year, the price of cooking oil has doubled, and the price of energy has also risen sharply. Housing problems are prominent, housing prices remain high, rents are rising, and many young people find it difficult to form a family because of housing problems.

The Turkish government has taken a series of measures to defuse the crisis. In terms of monetary policy, the Central Bank of Turkey has started the process of aggressive interest rate hikes since June 2023, and has raised the benchmark interest rate to 50% by a total of 4,150 basis points by March 2024. In 2025, the central bank will flexibly adjust interest rates according to the economic situation to balance economic growth and inflation control. In terms of fiscal policy, the government has intensified its crackdown on tax evasion, increased fiscal revenue, invested in infrastructure construction and public service optimization, and attracted investment. In terms of industrial policy, promote the upgrading of traditional manufacturing, support the development of emerging industries, and reduce dependence on imports.

These policies have had some success, with inflation falling from 75.45 per cent in May 2024 to 42.12 per cent in January 2025 and the lira depreciation rate improving. But inflation remains high, labor market improvement is limited, and the economic recovery is not yet on a solid footing.

Turkey's financial crisis is having an impact on the global economy. The depreciation of the lira has caused losses for international investors and increased capital outflow pressure from emerging markets. The decline in Turkey's import demand affects its trading partners, and the increase in the price competitiveness of its exports has also led to increased trade competition. The international community has expressed concern over the crisis in Turkey, with Germany considering emergency financial assistance and France's finance minister also expressing support. The International Monetary Fund may step in, but Erdogan has repeatedly rejected its assistance, and the process is fraught with uncertainty.

Turkey's future economic direction presents both opportunities and challenges. The government's policy adjustment has achieved initial results, but it still faces problems such as high inflation, employment difficulties, and external pressure. If Turkey can firmly implement economic reform policies and strengthen international cooperation, it can gradually emerge from the crisis, but this process is full of difficulties and requires joint efforts of all parties.