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Feb 5, 2023

The Turkish Economy Overcomes Difficulties in 2021

The Corona pandemic hit the Turkish economy, which was weak in financial and commercial terms at the beginning of 2020, especially as it was accompanied by the decline of the European economy, which is the largest partner of the Turkish economy, and oil prices did not succeed in closing the foreign trade deficit, as they declined that year with the decline in tourism.

However, the Turkish government tried hard to address this matter, but the financial situation of the declining reserves of the Turkish Central Bank, and the increasing deficit in the government budget, did not allow it to support traders and investors, as it was content with reducing interest rates for limited periods through government banks only, and it expanded loans and rescheduled Debt of large institutions to drive growth, and although this policy was relatively successful, it made investors and traders suffer from deferred debt.

However, a large number of traders preferred to use these soft loans at low prices to buy the dollar in order to speculate with it, in an attempt by the Central Bank to stabilize the price of the lira by selling its reserves in foreign currency through government banks, but the Central Bank has become unable to continue with this temporary solution, The central bank's foreign currency reserves amounted to minus 50 billion dollars, which led to a significant increase in inflation.

The decline of the Central Bank’s reserves and the failure of temporary solutions eventually led to the change of the Minister of Finance in November 2020, and a new Governor of the Central Bank was appointed in order to take new, different policies in line with the laws of the free market. The new administration adopted relative transparency, and raised the interest rate, which reached 17% at the end of 2020, and pledged to give priority to reducing the inflation rate.

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External debt and foreign exchange reserves:

Since 2001, Turkey has adopted a rapid growth model based on external borrowing, and by applying this model, Turkey's foreign debt amounted to $267 billion in 2018.

External debt has declined to $420 billion, but there is also internal debt worth $37 billion. Therefore, despite the government's orientation to new privatization projects, and the sale of institutions and real estate to foreigners, the deficit in providing hard currency still exists.

Turkish financial institutions and companies have also recycled their foreign debts into larger debts that are payable in a shorter time, as the debt rotation rate for Turkish financial institutions and banks has reached 95% of their outstanding debts, while companies have 65%. Because of the deteriorating economic situation in Turkey, its institutions are obliged to pay an interest rate that is 6 points higher than the rate approved by the US Federal Reserve, and this ratio has decreased to 4 after the recent changes in the Ministry of Finance.

Internal debt:

The value of the internal Turkish government debt is about 1.9 trillion Turkish liras (about 250 billion dollars), and these debts constitute 36% of the Turkish national product, which is not a high percentage compared to developing countries, but the rest of the developing countries have easy access to external debts of interest Less, and 58% of Turkey's internal debts are now denominated in dollars, not Turkish lira.

According to the Turkish Treasury, during 2021 the government must recycle 415 billion Turkish liras ($55 billion) of internal debt and $10 billion of its foreign debt. The budget will depend on raising taxes and increasing the internal debt again.

The Turkish government has relied on additional sources of income for one time during the previous years, such as paying an allowance for military service, and obtaining an amnesty for real estate violations in return for the payment of financial fines. It is possible that the government will resort to privatization again, especially in military industrial projects, construction projects and large real estate such as the New Istanbul Canal.

Sanctions and foreign policy:

The year 2021 began with Washington and the European Union imposing partial sanctions on Turkey, and unless Ankara finds a solution to its problems with Washington and Brussels, these sanctions could turn into financial sanctions that deprive Turkey of access to foreign exchange remittances.

Global markets and the global economy:

During 2021, Turkey will be facing the challenge of obtaining more external debt or financing sources that accept Turkish debt recycle or rescheduling. Turkey has four main parties: the United States, the European Union, China and Japan, whose central banks have large cash funds at interest rates close to zero. Therefore, if Turkey takes correct economic steps, and is able to restore the confidence of foreign investors, it can attract foreign investments again, which will be interested in High Turkish benefits rates and the stability of the Turkish lira.

This will require Turkey to keep the benifits rate high and reduce government spending, which will be reflected in the Turkish economy with low growth figures and an increase in unemployment rates. The most important challenge for Turkey remains the speed of global recovery from the Corona pandemic, as the entry of the global economy into a new crisis will weaken Turkey’s opportunity to obtain foreign financing, and it will deprive Turkey of the opportunity to raise its exports and attract tourists again, and this has a strong negative impact on Turkey. 

Investment in Turkey:

Since 1990, Turkey has adopted an open economy approach depending on debt and foreign investments for growth, due to the weakness of its domestic savings, and the lack of sources of wealth such as oil or gas. Therefore, Turkey is counting on quick investors and their money that enters the Turkish market to take advantage of the high benefits rate. As for the long-term investment and privatization policy, the political situation in Turkey does not help foreign countries take risks in Turkey.

The lira is still threatened so far, despite its relative stability during the recent period, and the prices of many companies and real estate have fallen and are now offered for sale due to the Corona pandemic and the economic crisis.

The Turkish government is now pursuing a policy of attracting foreign investors to establish their investments on its lands. It encouraged foreigners to buy real estate and allowed them to obtain Turkish citizenship through real estate investment or to obtain Turkish citizenship by buying property in Turkey or through commercial investment. It provided them with all Possible facilities as the value of real estate has been reduced, which entitles its owner to apply for Turkish citizenship and is doing everything possible to support the tourism sector to restore its economy and its strength to its former glory.

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