Osman Şenkul
According to the Balance of Payments Statistics announced by the Central Bank of the Republic of Turkey (CBRT) on 12 August, the situation can be summarised as follows based on annualised data: According to annualised figures, the current account deficit recorded as USD 18.9 billion in June, while the goods deficit recorded as USD 63.3 billion. In the same period, services recorded a net surplus of USD 62.1 billion, while the primary and secondary income realised a net deficit of USD 17.6 billion and USD 0.1 billion, respectively. As regards the annualized figures, the current account deficit was mainly financed through direct investment with a net inflow of USD 4.8 billion, loans with a net inflow of USD 21.1 billion and trade credits with a net inflow of USD 4.5 billion; while portfolio investment and the currency and deposits item had a negative impact on the current account deficit, amounting to USD 4.0 billion and USD 12.3 billion. The net foreign currency reserves of the Central Bank have decreased by USD 20.3 billion.
If Turkey’s current account deficit, which has been one of its main economic headaches for many years, cannot be financed by strong capital inflows, it will accelerate the depreciation of the lira. At first glance, it may seem easy to say, “That’s good, our exports will increase.”
Yes, exports will increase, but in countries like ours that rely heavily on imports for production, this creates cost inflation. Additionally, in economies with high import dependency like ours, currency appreciation directly increases the prices of imported goods and indirectly raises the costs of domestic production, leading to higher consumer prices—in other words, inflation. And, as we have frequently experienced, due to currency and inflationary pressures, the Central Bank of the Republic of Turkey (CBRT), which compiles and publishes these data on a monthly basis, may be forced to raise interest rates again in the coming period.
We say ‘may be forced to raise interest rates’ because some may say, ‘The Central Bank of the Republic of Turkey is lowering interest rates!’ Yes, the Monetary Policy Committee decided at its last meeting on 24 July to reduce the one-week repo auction interest rate, which is the policy interest rate, from 46 percent to 43 percent. However, at its meeting on 19 June, it decided to “keep the interest rate at 46 percent.”
Yes, at the previous meeting held on 17 April? “The Monetary Policy Committee decided to increase the one-week repo auction rate, which is the policy interest rate, from 42.5 percent to 46 percent.” While it is difficult to predict today what the Central Bank of the Republic of Turkey’s Monetary Policy Committee will do on 11 September, 23 October, and 11 December, when we look at these interest rate decisions, which are said to have been taken ‘to combat inflation,’ we can see that they are quite far from where they should be.
According to TurkStat data, the consumer price index rose by 2.06 percent in July, and annual inflation was announced as 33.52 percent. Based on this calculation, the CBRT’s weekly repo rate is seen to be 10.52 points above consumer inflation. Additionally, the Central Bank of the Republic of Turkey’s Monetary Policy Committee reduced the overnight lending rate from 49 percent to 46 percent. From this perspective, the difference between the Central Bank’s interest rate and inflation stands at 12.48 percentage points.
In short, the resurgence of the current account deficit clearly indicates an increase in net foreign exchange outflows. Therefore, closing this gap requires borrowing from abroad; however, due to high CDS rates, the interest on such loans will also rise significantly.
In summary, a persistently high current account deficit deepens financial fragility by increasing external borrowing, while also significantly raising production costs, thereby increasing the economy’s dependence on imports. This makes it crucial to strengthen sustainable production and external demand. In particular, Turkey’s high dependence on energy and intermediate goods imports, which account for a significant portion of its imports, leaves the country’s economy vulnerable to any external shocks; increasingly challenging conditions are also highlighting this.
The growing current account deficit inevitably leads to a continuous increase in external debt, and it is unclear where this will end. Finance Minister Mehmet Şimşek says that despite high costs, the government can find external debt, but as is well known, the cost of debt rollover increases as the debt stock rises. The high level of short-term debt in particular makes the economy vulnerable to global financial fluctuations.
In addition, the high interest rates, which have reached a level of mutual dependence, have inevitably dampened investment appetite and will inevitably slow down growth. Investors generally view high current account deficits as a sign of ‘external dependence,’ which accelerates capital outflows. In other words, high current account deficits, seen as an indicator of consumption and import-driven growth, force growth through debt rather than productivity gains in the long term.
First and foremost, in order to increase exports in Turkey, industrial production must increase. In 2024, industrial production increased by only 0.4 percent overall, with declines of 3-4% seen in some months. The contraction in production in the second and third quarters of 2024 led to a decline in exports during the same periods. In the first half of 2025 (January–June), the industrial production index averaged 1–2 per cent lower, while exports fell by 3–4 per cent compared to the same period last year. According to data from the TurkStat and the Turkish Exporters’ Assembly, a 1.0 percent decline in industrial production tends to reduce exports by approximately 0.7–0.9 percent in the short term.
This is because more than 90 percent of Turkey’s total exports consist of industrial products (automotive, machinery, electrical and electronic equipment, textiles, chemicals, etc.). Therefore, a slowdown or contraction in industrial production directly reduces the volume of goods to be exported. Especially in sectors focused on export-oriented production (automotive, white goods, machinery), production losses begin to reflect in export figures within a few months.
The source of cost increases that are suppressing industrial production lies not only in high interest rates, but also in exchange rates that are rising steadily, albeit at a slow pace, and which even high interest rates are unable to suppress. Turkey’s industrial sector is increasingly shifting its production and investment abroad due to factors such as global competition, cost pressures, financing conditions and access to foreign markets. Examples of this trend are diversifying, including mass migration in the textile sector, strategic steps focused on capacity expansion in steel, the search for logistical advantages in shipping, the expansion of sales and production networks in white goods, and regional strengthening in defence.
According to data from the Egypt-Turkey Business Council, due to inflation, high exchange rates and high interest rates, more than 200 Turkish textile companies moved their production facilities to Egypt in a very short period of time, resulting in the loss of approximately 300,000 jobs in Turkey. This move involved investments exceeding 3 billion dollars. With this latest move, the number of Turkish-owned businesses operating in Egypt has exceeded 1,700.
In addition, rising costs and financing difficulties in the shipbuilding and maritime transport sector have prompted some leading Turkish shipyards to shift production and investment abroad. Two of the largest companies based in Turkey have acquired the Norwegian shipyard Havyard Leirvik and the Dutch shipyard Norden Shipyard, respectively. According to statements made, these steps were also aimed at maintaining the sector’s competitive edge by leveraging advantages such as access to the European market, post-sales support, and financing ease.
Another sector that has seen significant migration abroad is ‘steel and metal processing.’ Leading companies in this sector have announced serious investment plans abroad in addition to their existing facilities. One of the leading companies in the sector has established production facilities in Algeria and Spain, as well as an integrated steel plant in an economic zone in Senegal; the same company has also announced plans to invest approximately 5 billion dollars in Saudi Arabia. In a statement outlining plans to increase production capacity from 14 million tonnes to 20 million tonnes, aiming to position Turkey among the top 30 global steel producers, it was also noted that the primary objective of the capacity expansion is to shift towards green energy and hydrogen-based production.
In this regard, significant shifts have also occurred in the durable consumer goods sector, and these shifts are continuing. Major players in the sector have acquired Whirlpool’s operations in the Middle East and Africa and are establishing new partnerships with European facilities. Additionally, production, sales, and service networks have been expanded in Thailand, Pakistan, India, Bangladesh, and CIS countries (Azerbaijan, Belarus, Armenia, Kazakhstan, Kyrgyzstan, Moldova, Uzbekistan, Russia, and Tajikistan).
Meanwhile, the public institution Aselsan is continuing its regional expansion in the defence technology sector, with a presence in Azerbaijan, Kazakhstan, Saudi Arabia, Jordan, the United Arab Emirates, and South Africa.
Looking back at all these developments, we can see the increasingly evident traces of rising unemployment, inflation, and worsening poverty in Turkey, which has been driven into a deadlock by high interest rates in recent times.
Although high interest rates are a tool used to control inflation and foreign exchange demand in the short term, they can cause significant and lasting damage to the economy when applied over the long term. Their effects are particularly pronounced in economies like Turkey, which rely heavily on investment and consumption for growth. Some liken high interest rates to a powerful fire hose used to extinguish a fire: it puts out the flames but also soaks the surrounding area. In the short term, it helps price stability, but in the long term, it negatively affects production capacity, employment, and income distribution. Credit costs increase, leading to the postponement or cancellation of investments in factories, machinery, and R&D, and the economy’s production capacity does not increase, and the potential growth rate decreases. Especially SMEs cannot access financing during periods of high interest rates and are forced to withdraw from the market. As we have experienced recently, credit-driven expenditures such as housing, automobiles, and white goods have declined significantly, leading to a weakening of domestic demand, reduced production, and rising unemployment.
As we are currently experiencing, as the interest burden increases, companies unable to refinance their debts go bankrupt, and there is a surge in the number of bankruptcies. In this regard, capital/finance-dependent sectors such as construction, textiles and automotive are the most rapidly affected.
As with individuals, the public’s borrowing costs also increase, and therefore, as we are currently experiencing, the share of interest payments in the budget rises, leading to a reduction in resources that could be allocated to areas such as education, health, and infrastructure. In Turkey, the share of interest payments in the budget exceeded 20 percent in 2024–2025. The target for the ratio of debt interest expenses to tax revenues in the 2025 budget was set at 17.5 percent. However, this figure reached 23.3 percent in the first six months of this year. In other words, 1 trillion 111 billion lira was spent on interest payments in the first half of the year. Interest expenses increased by 93.5 percent compared to the same period last year.
High interest rates may suppress the exchange rate in the short term, but in the long term, they increase demand for foreign currency due to a lack of investment and low production capacity. This leads to a vicious cycle where ‘high interest rates reduce growth, and therefore the exchange rate rises again.’ When bank deposit interest rates are high, large savers earn more, while low-income groups struggle due to the cost of borrowing. This situation widens the gap between the rich and the poor. High interest rates increase short-term ‘hot money’ inflows; however, these investments do not create sustainable production or employment. If the investment environment does not improve, even if interest rates decline, capital will flee, and a currency shock will occur.