What's Next for Türkiye?

Last week, the CBRT spent over $20 billion to stabilize the lira, and today, Istanbul’s mayor and Erdogan’s strongest rival, Ekrem İmamoğlu, was arrested for corruption—what’s next for Türkiye?

In a single week, Türkiye’s central bank has reportedly spent over 20 billion dollars in an attempt to stabilize the currency. Yet, despite this massive intervention, uncertainty looms large. Türkiye’ BIST 100 stock exchange closed the week with its worst performance since 2008. Is this the beginning of a new phase in Türkiye’s economic trajectory, or just another stopgap measure in a cycle of crisis management? The question of what comes next is widely debated.

I have compiled some key observations in this piece, but before we begin, you can refer to my previous post for background.

The Exchange Rate-Interest Rate Trap

Since 2013, Turkish capitalism has been shaped by what can be described as an exchange rate-interest rate trap, or a monetary policy dilemma. The core contradiction is this: economic growth requires lower interest rates, yet lowering rates triggers exchange rate shocks.

Before 2013, the 'strong Turkish Lira' coalition remained intact as long as capital inflows persisted. This coalition had a broad social base: large capital groups benefited from the policy framework, which in turn sustained the purchasing power of the middle class and enabled financial inclusion for the lower classes. Different fractions of capital profited from high growth rates.

While the 'strong Turkish Lira' policy helped control inflation, it also had significant downsides: an import boom, erosion of agricultural and industrial production structures, chronic high unemployment, and a persistent current account deficit. Furthermore, economic growth became increasingly dependent on external conditions, particularly capital inflows.

The Post-2013 Interregnum

The decade between 2013 and 2023 marked a period in which the unsustainability of the pre-2013 dependent financialization model became evident. However, no viable alternative model was developed, leaving the Turkish economy in a state of prolonged uncertainty—a kind of interregnum. I have previously characterized this period as one of "pseudo-developmentalism."

The Şimşek Program and Its Fragility

After 2023, the economic program led by Mehmet Şimşek aimed to return to pre-2013 conditions by controlling inflation through high interest rates and a strong Turkish Lira. A key objective of the program was to rebuild foreign exchange reserves. However, the fragility of this model—particularly its reliance on volatile financial inflows—quickly became evident.

The significant loss of reserves can largely be attributed to the structural design of the disinflation program, which depends on a currency that is not fully under domestic control (i.e., the exchange rate). In short, the Şimşek program represents a return to dependent financialization, increasing Türkiye's economic vulnerability.

What Comes Next?

Since the structural problems of the Turkish economy—namely, the accumulation model crisis—have not changed, we are effectively back to the same set of policy choices that existed before the December 2021 Monetary Policy Committee (MPC) meeting of the CBRT.

Let me elaborate: The fundamental issue now is no longer foreign investors, as they have largely exited the market. Instead, the critical challenge is how to manage the demand for foreign currency among domestic residents. There are two main policy options for addressing this:

1. Interest Rate Hikes: The extraordinary MPC meeting last week effectively implemented this approach, albeit in an implicit manner.

2. Soft Capital Controls and Active Reserve Management: Stabilizing the exchange rate may also require measures to limit residents' demand for foreign currency. This could take the form of soft or hard capital controls, mechanisms like the FX-protected deposit scheme (KKM), or more proactive reserve management strategies.

However, as seen during the 2023 election period, such measures have their limits, particularly due to the risk of a balance of payments crisis. The government's "U-turn" at that time, which brought Mr. Mehmet Şimşek back to the Finance Ministry, demonstrated the constraints of these policy choices.

Conclusion

The extent to which the government can manage the economic impact of recent political developments—particularly the İmamoğlu operation—will largely depend on how effectively it controls domestic demand for foreign currency. In the coming days, we can expect further steps in this direction.

While these are short-term concerns, the medium-term challenges remain unchanged: inflation and economic growth will continue to be the central issues shaping Türkiye's economic future.