Türkiye: reform momentum and the inflation trap

In our first blog post, we looked at how Türkiye’s political history has shaped the country we see today. In this second part, we turn to the economy: a story of strong reform, rapid growth and increasing fragility. 

Today, Türkiye is a country of contrasts. It is a G20 economy with a young population, a solid industrial base and a strategic location. At the same time, it faces high inflation, exchange-rate volatility and a policy environment that can be difficult to predict. 

From reform success to vulnerability

After a severe financial crisis in 2001, Türkiye implemented a comprehensive reform programme supported by the IMF and driven by the prospect of EU accession. The impact was significant: inflation fell, public finances improved, and investor confidence returned. Growth accelerated, incomes rose and a new middle class emerged. For a time, Türkiye was seen as a model for successful reform. 

Following this period of reforms the expansion started to rely more heavily on capital inflows, credit growth and construction from around 2007 on. This worked in favourable conditions, but it made the economy more sensitive to external shocks and shifts in investor sentiment. However, inflation remained under control. 

The inflation challenge 

In recent years, inflation has become the dominant economic issue because of unorthodox monetary policy keeping interest rates too low for too long. At its peak, it exceeded 80%, severely affecting purchasing power and confidence. Once inflation reaches such levels, it becomes difficult to control. Expectations change, behaviour adapts and price increases reinforce each other. 

Structural factors add to the inflation challenge. Türkiye is highly dependent on energy imports, and exchange-rate movements quickly feed into prices. Food and energy also represent a larger share of household spending than in many European economies, increasing the impact on consumers. 

A shift, but uncertainty remains 

Since 2023, economic policy has shifted towards a more conventional approach, with higher interest rates and a renewed focus on stabilisation. There are early signs of improvement, including a gradual decline in inflation. 

However, the key issue is credibility. Investors are not only interested in current conditions, but in whether policies will remain consistent over time. 

What this means for businesses 

Türkiye offers real opportunities, but also clear risks. Its market size, location and industrial base remain attractive. At the same time, volatility, financing conditions and policy uncertainty require careful consideration. Understanding these dynamics is essential for any company looking to engage with the country. 

Want more? 

This is just one part of a broader analysis. In our guide, we explore Türkiye’s economic model in more detail, along with its implications for investment and business strategy. Download the full guide here

In the next blog post, we will look at what this means for companies operating in Türkiye.