For better or for worse, Turkey is leaving behind a year that harbored economic highs and lows, from records in exports and stock markets to the dual challenge of soaring inflation and slide in the Turkish lira.
Among the breakthroughs in 2021 was the government’s decision to double down on an economic policy unveiled in the last quarter, one that aims for a low current account deficit and high growth rate through investment, production, employment and exports, instead of steeper interest rates.
The country has put forward comprehensive measures to offset the impact of the COVID-19 pandemic but has also dealt with a steep slide in the lira’s value, which it managed to reign in to some extent during the last weeks of the year.
The lira had fallen to an all-time low of 18.40 per U.S. dollar on Dec. 20, before recording a historic rebound on the same day after President Recep Tayyip Erdoğan announced a new scheme to protect lira deposits against currency volatility.
The depreciation in the lira made imports more expensive and followed a series of interest rate cuts, as the Central Bank of the Republic of Turkey (CBRT) slashed its key policy rates by 500 basis points to 14% since September.
Helping the national currency to rapidly regain some ground lost over the course of 2021, the scheme was designed to make citizens feel safer about holding their savings in the bank.
It effectively ties the value of special new deposits to the U.S. dollar by promising to compensate for losses incurred from swings in the exchange rate.
The measure had reversed the lira slide and triggered a historic 50% surge in the currency’s value in the week through Dec. 24. The currency had strengthened as much as below 11 per U.S. dollar in December but still remained weaker than the 7.44 at the start of the year.
Citing "unhealthy price formations," the central bank announced five direct interventions to support the lira earlier in December, including more than $2 billion (TL 26.7 billion) in the first three efforts.
‘Keep all savings in lira’
Erdoğan on Friday called on citizens to keep all their savings in lira and shift gold savings into banks, saying the recent exchange market volatility was largely under control.
"I want all my citizens to keep their savings in our own money, to run all their business with our own money," Erdoğan told a meeting with businesspeople in Istanbul.
"Let’s not forget this: As long as we don’t take our own money as a benchmark, we are doomed to sink. The Turkish lira, our money, that is what we will go forward with. Not with foreign currency."
Erdoğan said the government was concentrating all its strength and resources on establishing a new economy focused on employment and stability.
"Our aim is to provide both business people and citizens with a climate of trust and stability," he noted.
Erdoğan also reiterated his view that interest rates were the cause of inflation.
He said that for some time, they have been waging the battle of saving the Turkish economy from the cycle of high-interest rates and high inflation and taking it on the path of growth through investment, employment, production, exports and current account surplus.
"Interest rates down, interest rates up. My friends, let us please take this out of our books," he stressed. "Interest rates are the reason, inflation is the result. Interest makes the rich richer and the poor poorer."
Historic highs
Soaring industrial production and exports were the driving force in a year of strong economic growth for Turkey.
Export figures shattered record after record almost every month, while industrial production climbed on an annual basis for 16 months in a row.
By keeping up production levels and following pandemic measures, Turkish companies forged ahead of their international rivals during the COVID-19 crisis and global supply chain crunch, gaining a foothold in new export markets while meeting domestic needs.
Offering high-quality products at affordable prices with faster and reliable delivery, Turkish firms managed to establish themselves as the most important suppliers during a period of worldwide uncertainty.
After being hit in spring last year as the pandemic hurt trade with Ankara’s biggest partners, Turkey’s exports in the first half of the year hit $100 billion, the highest six-month figure ever.
The upward trajectory continued as the figure climbed to $203.1 billion (TL 2.73 trillion) as of the end of November, marking an all-time 11-month high.
Sales had exceeded the $20 billion threshold for the first time ever on a monthly basis after hitting $20.8 billion in September.
By October, Turkey’s share in global exports had surpassed 1%, another first for the country that marked a more than sixfold rise over the past two decades.
Growth and inflation
Turkey's economy had registered a major rebound in 2021 after a sharp slowdown a year earlier due to COVID-19 restrictions.
The gross domestic product (GDP) registered a historic 22% expansion in the second quarter, its highest annual mark since 1999. The economy grew 7.4% year-over-year in the third quarter.
The country is expected to have ended 2021 with double-digit GDP growth.
Published in September, the government’s medium-term economic program projected that the economy would expand 9% in 2021 and grow a further 5% in 2022.
Yet, strong readings thereafter triggered strong views that the GDP would register a double-digit growth for 2021.
Under the program, the government’s growth target for 2023 and 2024 is 5.5%, while the average expansion target is 5.3%.
This year also marked a major surge in inflation and the government has pledged to tackle what is seen as the economy’s chronic problem.
The annual consumer price index (CPI) rose to more than 21% in November, the highest reading since November 2018, after starting the year at 14.97%, driven by rising food and import prices, particularly energy, the supply constraints and the impact of exchange rate volatility.
Inflation is expected to have exceeded 30% in December, breaching the level for the first time since 2003, according to surveys. The government’s program projects annual inflation to fall to 9.8% by the end of 2022, while the year-end targets for 2023 and 2024 were set at 8% and 7.6%, respectively.
The country’s central bank has said temporary factors were driving prices higher and forecast that inflation would follow a volatile course in the short term.
Its monetary policy in 2022 will be formulated with a goal of bringing inflation gradually toward its medium-term target of 5%, according to its annual monetary and exchange rate policy framework report for 2022, unveiled on Wednesday. It said monetary policy would be designed to gradually reach the goal.
Erdoğan has repeatedly endorsed an economic model based on lower borrowing costs over the last months, and the government, regulators and banking associations have all embraced the new policy direction.
A consistent and vocal opponent of high borrowing costs, Erdoğan has reiterated a view that high-interest rates cause inflation.
On Dec. 16, Erdoğan announced a hike of 50.4% in the minimum wage, to become effective as of Jan. 1, 2022, raising the monthly amount to TL 4,250 to address the depreciation in the lira and inflation spike.
Reshuffles
The year 2021 also saw some major reshuffling in economic management.
Şahap Kavcıoğlu replaced Naci Ağbal as governor of the country’s central bank on March 20.
A day later, Ruhsar Pekcan was replaced by Mehmet Muş, a prominent member of the ruling Justice and Development Party (AK Party), as trade minister.
Nureddin Nebati took the helm of the Treasury and Finance Ministry on Dec. 2, after his predecessor Lütfi Elvan stepped down.
Nebati has been echoing the government’s new economic model based on lower interest rates, which is being endorsed by Erdoğan, who says the new policy direction will boost production, jobs, exports and growth.
Nebati said he would focus on addressing "chronic problems" plaguing Turkey’s economy, and "high interest rates will not be a priority."
Economic data
Among closely watched data, Turkey’s calendar-adjusted industrial production climbed on an annual basis for 16 months in a row, with the greatest spike of 66% seen in April.
Production expanded by 12.3% year-on-year in the first quarter of 2021, placing Turkey at par with top G-20 economies.
The upturn in the Turkish manufacturing sector continued as the purchasing managers’ index (PMI) hovered above the threshold level throughout the year, except in May, when COVID-19 lockdown measures were in place for much of the month.
Despite inflationary pressures and supply chain disruption, the manufacturing PMI rose to 52 in November, up from 51.2 in October.
Following seven months of deficit, the country’s current account balance also started posting a surplus from August onward. According to the latest data, the surplus stood at $3.16 billion in October, bringing the 12-month rolling deficit to $15.4 billion.
Unemployment in Turkey had dropped from 12.7% in January to 11.2% by October, according to the Turkish Statistical Institute (TurkStat). April saw the year’s highest unemployment figure of 13.4%, with the lowest level of 10.6% recorded in June.
Following a pandemic-induced major drop last year, Turkey’s tourism income shot up to $16.85 billion in the first three quarters of 2021.
The latest data from the Tourism Ministry showed that the country welcomed 22.8 million foreign visitors between January and November, marking a jump of 89.6% year-over-year.
Another bright spot in Turkey’s economic landscape was the country’s bourse, the Borsa Istanbul Stock Exchange (BIST), which made a flying start to 2021 with a record high closing of 1,495.43 points on Jan. 1.
That set the tone for a year that saw the BIST 100 index hit further heights, culminating in a new record closing of 2,278.55 points on Dec. 16.