The Turkish economy is heading towards fast-paced recovery after Covid-19 pandemic restrictions were eased early this year and international flights were resumed. The Turkish economy reflected strong growth in the second quarter of 2021. In the medium term, however, sustaining this growth may face significant challenges due to potential financial and monetary risks. This due to the exchange rates continue to be highly volatile and the Covid-19 pandemic imposes long-term consequences for the country’s economic activities, and particularly on the travel and tourism industries.
A surge in economic growth
From 2002 to 2017, Turkey’s economy posted strong growth, drawing praise from international institutions such as the International Monetary Fund and the World Bank. Later, the growth curve took a steep downward turn, due to political instability and the Covid-19 pandemic, as well as the unsound management of the economy. The dynamics of the Turkish economy can be outlined as follows:
1- Pre-pandemic slow growth:
The three years preceding the Covid-19 pandemic witnessed a slowdown in GDP growth. Data released by the World Bank reveal that the economic growth went down from 7.5%in 2017 to 3%in 2018. The downward trend continued to reach as low as 0.9%in 2019, to rebound to 1.8% in 2020.
2- Pandemic pressures:
Turkey’s GDP grew 4.4%in the first quarter of 2020, but after the Covid-19 outbreak, the economy shrank10.4%in the second quarter.
Later when the Turkish government took a series of measures to face the pandemic, the country’s GDP rebounded to an upward trend jumping 6.3% in the third quarter and 5.9%in the fourth quarter of last year. For the year 2020 as a whole, GDP rose 1.8%.
3- A leap in economic performance:
Turkey’s economic growth continued the momentum in 2021 growing 7.2%in the first quarter and a massive 21.7% year-on-year making Turkey the second fastest growing economy in the world after China.
The exceptionally strong performance of Turkey’s economy can be explained by the fact that any economy usually witnesses fast-paced growth rates after rebounding from a crisis. Following crises, economies recover losses when various economic activities resume normally and become fully operational again, and production is continued in the halted assets to add, only ostensibly, new values to the economy, while in fact it eventually reflects no actual growth.
That is why comparing the performance of Turkey’s economy in Q2 2021 to the same period of the previous year, when the pandemic broke out, shows the pace of recovering from the crises, but does not reflect the performance of this economy in normal circumstances.
Growth drivers
The Covid-19 pandemic caused a slump in private consumption in Turkey. The Turkish government, however, succeeded in driving growth in several sectors through economic stimulus measures, which enabled the economy to record remarkable growth in the current year. The most outstanding of these measures are as follows:
1- Government compensatory measures:
The Turkish government sought to mitigate the impact of Covid-19 pandemic through a series of support measures that contributed towards stimulating domestic demand. It supported individuals and businesses to encourage demand in the private sector and expanded government spending to stimulate demand in the public sector. The measures included monthly benefits for those on unpaid leave, subsidized lines of credit for individuals and companies, especially in the tourism sector, in addition to easing monetary constraints. This indicates that the public sector was the major driver of demand in the economy during recovery from the Covid-19 pandemic.
2- Accelerated imports as compared to imports:
Turkish exports of goods and services increased by 59.9% in the second quarter of 2021 compared with the same quarter of the previous year while imports of goods and services increased by 19.2%. The fast-paced growth of exports was driven by two dynamics, with the first being the recovery of European economies, especially in the Eurozone where demand for Turkish imports increased. The second is a slump of Lira that supported the competitiveness of Turkish exports in recipient countries.
3- Recovery of the manufacturing and services sectors:
The industrial and services sectors, which, combined, account for 82% of Turkey’s GDP, resumed theirnormal operations after the government eased Covid-19 restrictions and lifted the lockdown in June. Through this move, the government succeeded in driving the GDP growth. Growth in the first quarter of 2021 was led by services, which, in the second quarter, bounced back 45.8% annually, followed by industry growth of 40.5%.
Adverse repercussions
The following hurdles may impede the sustainability of Turkish economic growth in the medium term. These can be outlined as follows:
1- Lira Volatility:
The Turkish economy is under pressure from the continuous plummeting lira to the dollar value, attributedto ill-advised monetary policies. Eventually, this will lead to uncertainty about economic and commercial operations, as well as a decline in the purchasing power of individuals that drains their savings.
Data show that the lira to dollar value tumbled 19.6%against the dollar annually from 2018 to 2020, and 15% from January to July 2021.
The fluctuation was caused by persistent contention between the governors of the central bank and President Recep Tayyib Erdogan in the past years about interest rates. The president wants rate cuts to encourage credit growth and stimulate economic growth. This runs in conflict with the economic rules mandating monetary restrictions to contain inflation. As a result, the annual inflation rate accelerated to 19.5%, the highest since 2019.
The central bank recently cut its policy rate to 18% pushing the lira to hit a new record low of 9 to the dollar. A steady decline of the value of the lira would result in further dollarization in the economy, and push individuals to protect their savings by stockpiling gold, which can eventually damage the Turkish financial sector that plays a vital role in providing funds for private and public projects.
2- End of stimulus plans:
The aforementioned government measures, put in place to support employment and wages at the outbreak of the Covid-19 pandemic, are soon coming to an end. Last year, more than 3.5 million people benefited from the government’s subsidized wages in 2020. Additionally, the central bank deferred payments of non-performing debts. Therefore, ending these measures would result in a negative impact on the economy, as well as layoffs and higher rates of unemployment.
3- A new Covid-19 wave:
Despite accelerated Covid-19 vaccination, the global economy is still at risk of higher uncertainty, due to a potential new wave of the pandemic.
Amid concerns over potential outbreaks of new variants of Covid-19, such as Delta, Turkey, as well as its trade and investment partners, are at risk of potential partial lockdown, which means the Turkish economy might see a decline in demand on exports and tourism, disruptions in import supply chains that can eventually slow domestic manufacturing production.
Betting on Sustainability
Based on the aforesaid data, it is perhaps safe to say that the powerful jump of the Turkish economy came as a basic rebound resulting from reopening the economy, backed by the Turkish government’s adoption of short-term mechanisms, such as direct financial stimulus packages for individuals and companies, while at the same time benefiting from a lower value of the lira to stimulate exports.
Accordingly, the Turkish economy cannot offer guarantees for sustaining the boom of the second quarter of 2021. The economy is forecast to grow 5% in the year 2021 as a whole, slightly below the World Bank’s estimated 5.8% for the same year.
These figures remain below the average growth rates of Turkey’s economy before the currency crisis in 2018. Growth is expected to grow 4.5% in 2022, according to the World Bank, which is more optimistic than the International Monetary Fund’s forecast which expects the economic growth to go down to 3.3% next year.
In conclusion, it can be said that sustaining the momentum of Turkish economic growth will hinge on the adoption of new economic mechanisms that stimulate the economic activity in the medium and long term, while also addressing the financial and monetary challenges currently facing the country. Failure to address these challenges will lead to an imminent economic crisis in Turkey.
