Economic and Financial Crisis in Turkey

The 2018 crisis had a huge impact on Turkey because the country had heavily relied on external financing. As a result, high debts and due to the tremendous rise of account deficit, the lira had become overvalued. To worsen the situation, Turkish President Erdogan and Donald Trump clashed in their political views, which also affected the country’s currency and investment rates. The economic and financial crisis led to a decrease in Turkey’s GDP because of the reduction in the flow of financial funds, exports, and direct private investments (DPIs). However, the government tried to implement policies, including monetary and fiscal ones, to curb the damage that the crisis had left on the country’s economy. The central bank also reduced its interest rates to attract more investors and boost the value of the lira. The national economy started its recovery from the 2018 blow.

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2018 Economic and Financial Crisis in Turkey

A nation experiences an economic and financial crisis due to lack of required liquidities in financial institutes, which negatively affects the economy. In the case of Turkey, the crisis was the result of its high external debts, the devaluation of the lira, a political clash between the presidents of the USA and Turkey, and the decrease in demand for Turkish products. However, the current fluctuations in the financial and economic sphere were partially caused by the universal monetary situations in global economy. After the 2018 financial and economic crisis, Turkey was forced to diversify its outflow, exports, DPIs and financial inflows. Just like any crisis, the Turkish one had its effects, both positive and negative ones, not only on Turkey but also globally, so its mitigation required various fiscal and monetary policies, but some challenges remained in the economy.

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Causes of the 2018 Turkish Crisis

The 2018 financial and economic crisis in Turkey affected the nation’s economy and caused a recession. The amount of foreign debts that the country possessed was the first cause of this crisis. High debt rates seriously affected Turkey’s resources as well as the central bank’s balance sheet. Its decline significantly influenced the country’s control of debts. The second cause of the financial crisis was the actions of President Erdogan since his radical perception did not match the country’s monetary views. For example, he refused to increase interest rates, thus causing a conflict between the United States and Turkey. The political clash between the two states had a negative effect on the investment rate of foreign investors. The situation deteriorated when the USA imposed sanctions on the two members of the Turkish cabinet of ministers, which resulted in a political clash between the presidents of two countries. Therefore, the difficulties in relations between the two states significantly exacerbated the financial situation in Turkey. Thirdly, the situation worsened because of the crisis in financial institution due to the changes in the lira currency rate, which caused a decline in Turkey’s economic activities since the demand for its products decreased (Türkmen-Ceylan, 2019). Moreover, the central bank had insufficient foreign exchange reserve, which also led to a decline in the demand for lira. As a result, the nation’s exports surpassed the imports, subsequently causing a deficit in its international trade.

Crisis Effect on Turkish and Global Economies

In recent years, Turkey has been one of the fastest growing economies in the world, but its economy was highly affected by foreign currency debt. In addition, the crisis resulted to the upsurge of joblessness due to the rising cases of bankruptcy. As a result, the country had a 5.8% GDP of current account deficit and a 457 billion dollars of foreign currency debt (Arbaa & Varon, 2019). The inadequacy of raw materials, high production costs, and lack of incentives from the government only worsened the investment situation (Cavusgil et al., 2013). The demand for Turkish goods declined, which only added to the economic crisis the country faced. Lastly, the decline in both the flow of DPIs and monetary resources reduced the supply of foreign exchange. The global economic development experienced in 2018 helped many countries in regulating their poverty levels. Policymakers focused on such ways as boosting efficiency and labor force input in order to hasten progress to end poverty and enhance a common wealth to support growth. Additionally, most emerging markets experienced an increase in their shares due to the increase in global consumption. Lastly, due to the prospects of a more robust global economy, there has been improvement in the relationship between traders and consumers since investment rates increased across the world, thus improving the exports of major nations.

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Fiscal and Monetary Policies Implemented by Turkey

Monetary policy are the government’s actions employed to impact trade and industrial activities by controlling currency and credit supplies and by changing interest rates. The Central Bank of Turkey used government bonds, backup supplies, and interest rates to impact its monetary policy. These tools greatly affected the quantity that the bank could loan, thereby influencing money supply in the country. Additionally, the central bank used expansionary monetary policy to decrease unemployment by giving other financial institutions money to lend (Guler, 2020). As a result, they lowered their loan interest rates to businesses, which led to the increase of demand and spurred the country’s economic growth.

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Fiscal policy is described as the measures that the government implements to influence and balance the economy. The key objective of this policy is to attain and uphold full employment, to stabilize rates and grosses, and to boost economic growth (Guler, 2020). Turkey employed the expansionary fiscal policy to deal with the 2018 financial and economic crisis. Thus, the government took certain measures to implement this policy. The first one was to encourage consumption spending where major discounts were made in consumption tax rates. The second plan was to promote employment, so substantial expenditures were planned in this sphere, including training packages for the unemployed. The third strategy was to stimulate investment, so for it to be successful, the government announced a wide-ranging incentive package that included income tax reductions, interest rate grants, and so on. Lastly, the fourth approach was to promote the flow of capital where levy exemptions were declared for wages made out of the country, while the asset peace rule implied that all unrecorded assets would have a tax amnesty. These measures aimed at stabilizing the economy.

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Challenges for Turkish Economy After the Crisis

Despite Turkey recovering from the 2018 financial and economic crisis, the country still faces some challenges. Thus, inflation rates still cause problems since financial devaluation has been a crucial aspect behind Turkey’s inflation burden. Additionally, distress over the central bank’s liberation and a political issues with the United States only powered those losses. The Turkish government forecasted a 12% inflation rate at the end of 2019, with the eventual decrease to 8.5% (Arbaa & Varon, 2019). However, since inflation starts to decline, the central bank is expected to reduce its interest rates. At the same time, despite the fact that unemployment rate is high in the majority of developing countries, in Turkey, it has been reported to be even higher. After the 2018 crisis, it grew to 14.7% in 2019 (Guler, 2020). High rates of unemployment are distinctive signs of economic distress that leads to weak economic growth. Due to this issue, consumer spending, which is one of the key drivers of growth in a country, decreases, thus resulting in a recession. Turkey also still has issues due to its weak lira. The currency crisis highly affected the value of the lira and pushed the economy into recession. Turkey’s interest rate was high compared to other countries, so investors preferred to quit this market. However, recently, the national currency has started to recover the losses. Finally, the demand for Turkish products is still low since investors still sell more assets than buy.

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Conclusion

Turkish financial institutions were affected by the 2018 economic and financial crisis that led to a slowdown in the country’s economic activities. The crisis was the result of high foreign debts, Erdogan’s personal views on interest rates, the political clash between him and President Trump, and changes in the currency rates. Due to the increase of interest rates, the country lost many foreign investors. Additionally, the decrease in the number of exports led to a tremendous growth of unemployment. However, over the years, Turkish economy has begun to recover. While it still experiences some issues, such as inflation, unemployment, low demand for its products, and weak currency, the government has employed financial and fiscal policies that would help curb any future challenges that the nation may face.

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