The Turkish Economy

 ECONOMIC OVERVIEW

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

The Turkish economy was struck by Covid-19 particularly after March as the country went into a nationwide lockdown, with some of Europe's strictest measures against the breakout of the pandemic. The government sought to mitigate the effects of Covid-19 by loosening its monetary policy, extending credit and delving into its foreign reserves. This strategy made the country grow by 1.8% of GDP in 2020. Thereafter, the economy rebounded by 6.7% in the third quarter of 2020 (Turkish Statistical Institute) and is expected to grow by 6% in 2021 (IMF April 2021 forecast).

Turkey's GDP had already grown below projections at 4.5% in the first quarter of 2020 before shrinking by 9.9% in April-June at the height of the pandemic. Turkey's strong hospital infrastructure limited the extent of Covid-19 cases and deaths but demand and employment contracted sharply well into the third quarter. The government introduced a series of support measures, both on micro and macroeconomic level, launching unemployment schemes, unpaid leave subsidies as well as subsidised credit lines to individuals. The central bank adopted an expansionary monetary stance, supporting the lending capacity; however, this resulted in interest rates falling below market expectations and a rapid decline in the value of the lira. The central bank's foreign reserves dipped in the first 10 months in line with the expansionary policy. The government took an almost complete U-turn in November, appointing a new chairman to the central bank as well as a new finance minister, which halted the expansionary policy and led to a partial recovery of the value of the lira. At the same time, government support measures supported manufacturing activity, which not only recovered from its nadir in the second quarter but also rose on the year in the fourth quarter. Nonetheless, Turkey's macroeconomic balance mostly worsened on the year, with its current account extending a deficit of nearly USD 24 billion, compared with a surplus of USD 8.9 billion in 2019. The deficit is projected to narrow to USD 5.8 billion in 2021; however, this will depend on external factors, including a recovery of international trade and tourist activity. General government gross debt, while remaining low, continued to increase to 36.8% of GDP at the end of 2020 from 32.6% in the previous year. According to the IMF's updated April 2021 estimates, debt is expected to increase to 37.1% in 2021 and 38.8% in 2022. The overall budget deficit fell to 3.3% of GDP in 2020 and the IMF expects it to remain stable over the next two years. Inflation has been estimated at 12.3% in 2020, and is expected to rise to 13.6% in 2021 and 11.8% in 2022.

The unemployment rate had already reached 13.7% at the end of 2019 and was further impacted by Covid-19 as most businesses remained closed for months whereas tourism - a major source of employment - took a nosedive. The rate was projected to reach 13.1% by the end of 2020 (12.7% by October 2020 according to Turkish Statistical Institute) but is forecast to inch down to 12.4% in 2021 and then further to 11% in 2022 amid an economic recovery. Youth unemployment, which peaked at 26.1% in June 2020, fell back to 24.9% by October. Wage inequality and the size of the informal sector remain as long-standing problems.

 

Main Indicators 2018 2019 2020 (e) 2021 (e) 2022 (e)

GDP (billions USD) 779.60 760.94 719.54 794.53 868.44

GDP (Constant Prices, Annual % Change) 3.0 0.9 1.8 6.0 3.5

GDP per Capita (USD) 9 9 8 9 10

General Government Balance (in % of GDP) -3.7 -4.8 -3.3 -3.4 -3.3

General Government Gross Debt (in % of GDP) 30.2 32.6 36.8 37.1 38.8

Inflation Rate (%) 16.3 15.2 12.3 13.6 11.8

Unemployment Rate (% of the Labour Force) 11.0 13.7 13.1 12.4 11.0

Current Account (billions USD) -20.75 6.76 -36.72 -27.25 -19.46

Current Account (in % of GDP) -2.7 0.9 -5.1 -3.4 -2.2

Source: IMF – World Economic Outlook Database , April 2021

MAIN SECTORS OF INDUSTRY

The agricultural sector constitutes 6.4% of Turkey’s GDP. Despite employing nearly 18% of the population, the sector continues to suffer from low productivity due to reliance on small farms. Approximately 11% of Turkey’s territory is used as agricultural land. Wheat is the country’s main crop, though Turkey is the world’s third largest exporter of tobacco and the largest producer of hazelnuts (nearly 70% of global production). Turkey continues to be a net exporter of agricultural products (nearly USD 18.6 billion in agricultural and food exports as opposed to USD 14.3 billion in imports in January-November 2020 according to Turkish Federation of Food and Drink Industry Associations), nonetheless livestock imports in particular grow exponentially to compensate the shrinking animal breeding sector. Mineral resources are abundant, but under-exploited. Turkey's recent discovery of natural gas resources in the Black Sea could help increase the share of mineral activity in economy in the near future.

Manufacturing is the main industrial activity of the country. Secondary sector accounts for 27.2% of GDP and employs 26% of the workforce. The Turkish government gives special priority to large infrastructure projects, particularly in the transport sector, through Build-Operate-Transfer (BOT) project financing model. Car manufacturing and textile spearhead the Turkish industry.

The services sector has grown rapidly in early 2000s, peaking at 59% of GDP in 2009 but has fallen since to account for 56.5% of GDP in 2019, while employing 55.9% of the country’s workforce (2020). Tourism represents nearly 4% of GDP and is a major source of foreign currency for the nation. However, Turkey’s tourism income has narrowed significantly in 2020 as the COVID-19 pandemic led to worldwide travel restrictions, border shutdowns, and an overall drop in consumer demand. According to estimates by the Turkish Ministry of Tourism and Culture, Turkey's tourism sector is likely to experience a 70% contraction in 2020. Tourism revenue is expected to reach just over USD 11 billion, with a total of 15 million travelers.

 

Breakdown of Economic Activity By Sector Agriculture Industry Services

Employment By Sector (in % of Total Employment) 18.1 25.3 56.6

Value Added (in % of GDP) 6.6 27.8 54.6

Value Added (Annual % Change) 4.8 0.6 1.1

Source: World Bank - Latest available data.

 

Monetary Indicators 2015 2016 2017 2018 2019

Turkish Lira (TRY) - Average Annual Exchange Rate For 1 USD 2.72 3.02 3.65 4.83 5.70

Source: World Bank - Latest available data.

FOREIGN TRADE

Turkey’s economy is open to foreign trade, which represents 61.4% of its GDP (World Bank, 2019). Automobile (12.1% of total exports including passenger cars, transport vehicles and accessories for vehicles) and oil products (3.9%) were top exports of Turkey in 2019, followed by jewellery, textile and steel products. The main imported products were gold (5.4%), oil (4.5%), motor cars and accessories (4.2% in total), ferrous waste (2.7%) and coal (1.7%). Turkey's volume of exports declined by an unprecedented rate of 17.8% in 2020 mainly due to Covid-19 whereas its imports contracted by 6.4%. Turkish exports are forecast to rebound by 26.5% in 2021 with its imports projected to rise at a slower rate (6%) (IMF).

Germany (9.2% of all exports), the United Kingdom (6.2%), Iraq (5.7%), Iraq (5%), Italy (5.4%) and the United States (5%) were among the top destinations for Turkish exports. Russia (11%) and Germany (9.2%) were the main supplier of goods in Turkey, followed by China (9.1%), the United States (5.6%) and Italy (4.4%). Turkey has 21 active free trade agreements (FTAs), including its very first trade deal with the European Economic Area in 1991 and the most recent one with the United Kingdom, which entered into force on 1 January 2021. Trade agreements with Qatar, Lebanon and Sudan are also expected to enter into force soon. At the same time, Turkey has pursued FTA negotiations with Ukraine, Japan, Thailand and Indonesia and will soon start renegotiating the terms of its existing agreements with Georgia, Malaysia and Moldova. The United States imposed additional duties on imports of Turkish steel in August 2018 but they were reduced back to 25% in May 2019. The hike was found illegal by the US Court of International Trade in 2020. However, the EU launched its own dumbing probe into Turkish steel imports last year and is now looking to impose duties on Turkish iron and steel imports.

Turkish trade structure has been characterised by a wide deficit (USD 16.6 billion in 2019) mainly due to energy imports and most of its exports being tied to imports of intermediate, semi-finished or raw products and as such, the evolution of trade balance has been traditionally linked to economic growth and the lira's against value against the US dollar. In 2019, Turkey's non-service imports totalled USD 210 billion, whereas the total value of its exported goods reached USD 181 billion. According to WTO, exports of services in 2019 were much higher than imports, USD 64 billion and USD 27 billion respectively. The government has maintained an active policy of incentivising the use of locally sourced fuel for power generation by supporting renewables and domestic coal-fired production in order to reduce the country's reliance on gas imports. At the same time, the currency crisis, which brought the value of Turkish lira to historic lows in August 2018 and then in October-November 2020, pressured imports and boosted exports. According to preliminary data from the Turkish Ministry of Trade, Turkish exports reached USD 170 billion in 2020 while its imports rose to USD 219 billion.

 

Foreign Trade Values 2015 2016 2017 2018 2019

Imports of Goods (million USD) 207,199 198,610 233,800 231,152 210,345

Exports of Goods (million USD) 143,883 142,557 156,993 177,169 180,833

Imports of Services (million USD) 20,819 22,215 22,668 26,848 26,813

Exports of Services (million USD) 45,910 37,634 43,384 58,237 64,130

Source: World Trade Organisation (WTO) ; Latest available data

Foreign Trade Indicators 2016 2017 2018 2019 2020

Foreign Trade (in % of GDP) 48.3 55.8 62.5 62.7 60.9

Trade Balance (million USD) -39,923 -58,575 -40,726 -16,751 -37,849

Trade Balance (Including Service) (million USD) -19,400 -32,242 -10,552 18,777 -28,344

Imports of Goods and Services (Annual % Change) 3.0 10.6 -6.4 -5.3 7.4

Exports of Goods and Services (Annual % Change) -1.7 12.4 9.0 4.9 -15.4

Imports of Goods and Services (in % of GDP) 25.2 29.7 31.3 29.9 32.3

Exports of Goods and Services (in % of GDP) 23.1 26.0 31.2 32.7 28.6

Source: World Bank ; Latest available data

Foreign Trade Forecasts 2020 2021 (e) 2022 (e) 2023 (e) 2024 (e)

Volume of exports of goods and services (Annual % change) -18.0 20.2 10.0 8.0 8.0

Volume of imports of goods and services (Annual % change) 5.4 8.7 7.9 7.0 7.6

Source: IMF, World Economic Outlook ; Latest available data

Note: (e) Estimated Data

 

 

Main Partner Countries

Main Customers

(% of Exports) 2019

Germany 9.2%

United Kingdom 6.2%

Italy 5.4%

United States 5.0%

Spain 4.5%

See More Countries 69.7%

Main Suppliers

(% of Imports) 2019

Russia 11.0%

Germany 9.2%

China 9.1%

United States 5.6%

Italy 4.4%

See More Countries 60.7%

Source: Comtrade, Latest Available Data

POLITICAL OUTLINE

Current Political LeadersPresident : Recep Tayyip Erdoğan (since August 2014) - AKP

Head of Government:  President Recep Tayyip ERDOGAN (since August 2014); a 2017 constitutional referendum eliminated the post of prime minister after the 2018 general electionNext Election DatesPresidential : June 2023

Legislative: June 2023Current Political ContextIn Novmber 2020, Turkish President Recep Tayyip Erdogan appointed Naci Agbal as the new chairman of the country's central bank while removing Berat Albayrak - his son-in-law - from the office as Minister of Treasury and Finance. This came after the government's economic policies came under criticism during Albayrak's tenure and as the independence of the central bank was put into question by Erdogan's repeated interventions. The lira has recouped some of its losses after hitting an all-time low in early November but ended 2020 considerably weaker than a year earlier. The ruling party AK Party's former prominent members Ahmet Davutoglu and Ali Babacan founded their own political parties in 2020 in an attempt to sway liberal voters. Turkey provided military support to Azerbaijan during the 2020 Nagorno-Karabakh conflict, which resulted in Azerbaijan’s regaining control over territories it had lost in the first war against Armenia. Turkey agreed to form a joint peacekeeping mission with Russia.Main Political Parties- Justice and Development Party (AKP): centre-right, primary leading party, socially conservative

- Republican People’s Party (CHP): centre-left, primary opposition party based on social-republican values

- Peoples' Democratic Party(HDP): pro-minority, left-wing, socialist and democratic

- Nationalist Movement Party (MHP): nationalist party

- The Good Party (IYI Parti): Nationalist, ConservatistExecutive PowerThe President of the Republic is the head of state and the head of the government. He or she is elected by direct universal suffrage for a five-year term of office. The President has the function of an arbitrator (promulgation of laws, signature of decrees) and appoints the Council of Ministers. The President also appoints the judicial organs and other governmental organs. The position of Prime Minister was abolished following the constitutional referendum of April 2017.Legislative PowerLegislative power in Turkey is unicameral. The Parliament, called the Grand National Assembly of Turkey, has 600 seats and its members are elected by universal suffrage for five years, according to a system of proportional representation.