ASSESSMENTS

How Much Longer Can Turkey Avoid a Financial Crisis?

MIN READDec 8, 2022 | 21:14 GMT

A man selling pigeon seed is seen outside Istanbul's Spice Bazaar on Nov. 3, 2022, after the Turkish government announced the country's official inflation rate had hit a 25-year high of 85.5% in October.

A man selling pigeon seed is seen outside Istanbul's Spice Bazaar on Nov. 3, 2022, after the Turkish government announced the country's official inflation rate had hit a 25-year high of 85.5% in October.

(Chris McGrath/Getty Images)

Despite extremely high inflation and unorthodox monetary policies, Turkey has so far avoided a systemic financial crisis. But its government's continued focus on near-term economic growth over long-term sustainability will increase the risk of the country entering such a crisis in 2023. Turkey's economy grew quickly in 2022 as the country emerged strongly from the COVID-19 pandemic and absorbed the initial shocks of Russia's war in Ukraine. But this brought with it soaring inflation (which hit an eyewatering 84% last month) and a deeply weakened currency (which has lost almost one-third of its value year-on-year). Unlike other countries that have responded to the post-COVID-19 and Ukraine-related surge in global commodity prices by tightening their monetary policies, Turkey has pursued monetary easing -- resorting to orthodox and unorthodox measures to slow the lira's depreciation, which has increased the financial burden of companies with foreign-currency debt. But while this unconventional strategy has...

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