Prices Soar, Lira Plunges: What's Behind Turkey's Inflation Crisis

Balance of Payments and Currency Storm: Challenges Facing Turkey's Economy

Back in the 1990s, Turkey faced extreme inflation growth that sometimes exceeded 100% per year—for instance, in 1994 it reached105.22%. At the time, the state had been living beyond its means for years. A massive budget deficit was monetized through the Central Bank (expanding the money supply, or so-called "printing money"), which directly fueled inflation and the devaluation of the Turkish lira: in 1994 alone, the lira lost more than 70% of its value against the U.S. dollar (from 14,772 lira per $1 to 38,813 lira per $1). The economy lurched between brief spurts of growth and sharp downturns, leaving no room for sustainable development.

Recep Tayyip Erdoğan's rise to power in the early 2000s marked the starting point for a tangible economic upswing. During this period, the country experienced what was called an "economic miracle"—GDP growth consistently exceeded 5% annually, while inflation dropped from double-digit levels—from 54.9% to 6.25%. In 2009, despite the global financial crisis (when global GDP declined by 0.7% for the first time since World War II and world trade contracted by a record 10%), Turkey kept inflation at a low level (6.25%), while Russia's inflation at the time stood at 8.3%.

From the early 2010s onward, the situation began to deteriorate, and inflation started rising rapidly. This was linked to changing macroeconomic conditions and so-called "Erdoganomics." At the same time, the Turkish lira depreciated substantially against the U.S. dollar. If in 2015 $1 cost around 2.5 lira, by the end of 2020 the exchange rate exceeded 8 lira, and today $1 is worth just over 41 Turkish lira. This represents one of the most significant national currency collapses over the past decade, alongside the depreciation of the manat and the ruble.

Inflation at Its Peak: A Destructive Cocktail of Factors

The key factor accelerating inflation was precisely "Erdoganomics"—the unconventional monetary policy promoted by Turkey's president. Erdoğan believed that inflation could be defeated through low interest rates rather than high ones. Experts link this drive by Erdoğan to the fact that high interest rates hit the construction business hardest, which serves as one of the major donors to the party headed by Turkey's president.

Moreover, Turkey is 74% dependent on energy imports, which has always made it hostage to global price dynamics. However, expensive oil alone cannot explain the record 85% inflation that occurred in October 2022. Rising energy prices became the match struck against a well-prepared combustible mixture. This mixture had been created over years by fiscal policy and growing public debt.