Summary
This analysis examines the nature of growth in the Turkish economy over the past decade, showing that it is not based on traditional economic equilibrium but rather on the continuous management of imbalances. Since 2016, economic policies have tended towards stimulating domestic demand to maintain growth, which has helped support economic activity but has simultaneously deepened dependence on imports.
This has led to a widening trade deficit, which reached about $92 billion in 2025, financed through external debt and capital flows. In response, reserves and monetary policy have been used to contain the pressures resulting from this model.
The analysis concludes that the Turkish economy represents a case of growth that is sustainable in the short term but faces clear limits in the medium term, due to the persistent deficit and rising debt. Therefore, the challenge lies not in achieving growth but in restructuring it towards a more sustainable model.
Introduction
At a time when pressures on emerging economies are increasing due to rising global interest rates, tightening monetary policies, and escalating geopolitical fluctuations, these economies find themselves facing growing challenges in maintaining growth stability (IMF, 2023). However, the Turkish case stands out as a distinct case, not because it is the only one achieving growth, but because this growth is achieved within a context of clear structural imbalances. It does not clearly belong to economies suffering from acute crises, but at the same time, it does not present a model of traditional economic stability. Rather, it reflects a specific pattern of growth based on the coexistence of economic expansion and macroeconomic pressures (Rodrik, 2008).
On one hand, the Turkish economy continues to achieve consistent growth and notable economic activity with a relative ability to absorb shocks, especially through expansion in domestic demand and monetary interventions (TurkStat, 2026). On the other hand, clear structural imbalances accumulate, including high inflation, a persistent trade deficit, and increasing dependence on external financing (Trading Economics, 2026; CEIC Data, 2025). This coexistence of growth and imbalance is not merely a numerical paradox but reflects a specific economic pattern.
Data indicates that the Turkish economy recorded growth of about 3.6% in 2025, with more than twenty consecutive quarters of economic expansion, reflecting the continuity of economic activity despite macroeconomic pressures (TurkStat, 2026). However, this performance is accompanied by a trade deficit of about $92 billion, external debt rising to over $527 billion, in addition to persistent inflationary pressures and exchange rate volatility (Trading Economics, 2026; CEIC Data, 2025; IMF, 2024). These are not just numerical paradoxes but an expression of a distinct economic model in its own right.
Here lies the fundamental problem: How can an economy grow at this pace while sources of fragility are increasing within it?
This article starts from a basic idea: that this contradiction is not accidental but reflects a distinct economic model that can be described as demand-driven growth within managed fragility (Thirlwall, 1979). Accordingly, this article does not merely describe economic indicators but seeks to explain how this model works by tracing the relationship between domestic demand, the external deficit, financing, and monetary policy as interconnected rings in a single system (Hall, 1993; Khan, 2010).
How to Understand the Turkish Case?
The problem in reading the Turkish economy is not a lack of data or absence of indicators, but rather the framework we use to understand this data. Traditional macroeconomic approaches assume a relatively stable relationship between economic policy tools and their outcomes; that is, raising interest rates is supposed to curb inflation, currency stability enhances external balance, and monetary discipline ultimately leads to economic stability.
However, the Turkish experience in recent years shows that these relationships do not always work so simply. Growth continued despite unorthodox monetary policies at certain stages, inflation rose despite attempts to contain it, and the exchange rate remained vulnerable to fluctuation despite interventions. This does not mean that economic rules are no longer valid, but that their interpretation requires looking at the broader context within which they operate (Hall, 1993; Rodrik, 2008).
Hence, it is necessary to move from analyzing individual policies to understanding the “growth system” as a whole. That is, we ask: How do monetary policy, domestic demand, and external financing integrate within a single model? And how is this growth maintained despite imbalances?
The literature on the “political growth system” provides a suitable framework for this type of analysis, as it views the economy as the result of a political and institutional settlement that determines how resources are distributed, who benefits from growth, and how crises are managed (Khan, 2010). Within this perspective, economic policies are understood not merely as technical decisions but as tools for managing broader equilibria.
In the Turkish case, this framework helps explain what appears superficially as a contradiction. Growth is not achieved despite imbalances, but is maintained through mechanisms that allow them to be managed. This explains how an economy can combine continuous economic expansion, inflationary pressures, and increasing dependence on external financing.
Accordingly, the right question is not: Are Turkey’s economic policies successful or failing? But rather: How does this model work? And what are the mechanisms that allow it to continue despite the tensions it carries within?
Demand as a Driving Force and a Source of Imbalance
Reliance on domestic demand was not a new phenomenon in the Turkish economy, as this demand was one component of growth during earlier periods, especially given the abundance of external capital flows and credit expansion during the first decade of the millennium. In that period, growth was supported by a mix of factors, including external financing, investment, and consumption expansion, within an international environment characterized by low borrowing costs and high liquidity (IMF, 2018).
However, this pattern began to gradually change as these conditions receded. Since the middle of the last decade, with tightening global financial conditions and rising levels of uncertainty, traditional sources of growth began to lose momentum. In this context, domestic demand emerged as a more important tool in supporting economic activity.
The most obvious shift came after 2016, where economic policies increasingly moved towards stimulating domestic demand as the primary means of maintaining growth. This shift was not a theoretical choice but rather a direct response to the changing economic environment, as low-cost capital flows declined, pressures on the exchange rate increased, and levels of economic and political risk rose (Rodrik, 2008).
In this context, demand stimulation relied on specific tools, foremost among them credit expansion, increased public spending, and support for activity-intensive sectors such as construction and infrastructure. This intersects with what the literature on Turkish political economy indicates regarding a gradual shift in the economy’s structure in favor of the construction sector at the expense of manufacturing, which boosts short-term growth without sufficiently developing the productive base (Parlar Dal, 2020).
But this apparent strength conceals a source of structural imbalance within. Demand-driven growth implicitly assumes that the economy is able to meet this demand through expanded domestic production. However, this assumption is not fully realized in the Turkish case, due to the economy’s heavy reliance on importing energy, raw materials, and intermediate goods.
Here emerges the crucial relationship that explains a large part of the Turkish economy’s dynamics: whenever domestic demand rises, the need for imports increases. In other words, high demand does not fully translate into expanded domestic production, but a large part leaks abroad in the form of imports. This makes growth itself directly linked to the widening of the trade deficit, consistent with what the economic literature indicates regarding the balance of payments constraint (Thirlwall, 1979).
Thus, demand in the Turkish case becomes a double-edged sword: it maintains growth on one hand, but simultaneously reproduces the imbalances that limit its sustainability.
The Trade Deficit as a Structural Outcome of Growth
In light of the growing role of domestic demand in driving growth, the trade deficit in the Turkish economy becomes an expected result, not a deviation from the path. The relationship between the two is not accidental but reflects a structural imbalance between demand expansion and the economy’s ability to meet this demand through domestic production (Thirlwall, 1979).
From a temporal perspective, the trade deficit in Turkey was not a new phenomenon, having accompanied previous periods of growth, especially during the first decade of the millennium, where it remained at relatively containable levels given strong capital flows (IMF, 2018). However, this deficit took on a deeper character during the last decade, with the changing structure of growth.
Data indicates that the trade deficit reached about $92 billion in 2025, with pressures continuing through 2026 (Trading Economics, 2026). However, the significance of these figures lies not only in their size but in what they reflect about the nature of growth itself.
High demand in the Turkish economy is not limited to consumption but also includes investment, especially in sectors such as construction and infrastructure, which rely heavily on imported inputs. This intersects with what recent studies on the Turkish economy indicate regarding continued dependence on intermediate imports and weak industrial transformation, despite high growth rates (Parlar Dal, 2020).
Here the relationship forms clearly: growth generates demand, demand increases imports, and imports widen the deficit.
Nor is the matter limited to the volume of imports, but extends to their structure. A large part consists of intermediate and capital goods essential for production, making their reduction without affecting growth extremely difficult.
External factors further complicate this situation. Turkey’s heavy dependence on energy imports makes its trade balance sensitive to global price fluctuations (World Bank, 2025). At the same time, gold imports add a different dimension to this deficit, reflecting economic behavior linked to hedging against inflation and currency volatility (IMF, 2024).
In this context, the trade deficit becomes a direct expression of the prevailing growth pattern, not merely a short-term correctable imbalance – it is a structural outcome of an economic path that relies on demand given an incomplete productive base.
External Debt as a Financing Mechanism and Continuation of Growth
If the trade deficit is a direct result of demand-driven growth, the question that arises is how this deficit is financed. Here, external debt appears not as a secondary factor but as an essential element in the continuation of this growth.
In the Turkish case, external debt does not merely represent the result of accumulated imbalances but constitutes, to a large extent, a practical condition for the continuation of economic activity. When an economy imports more than it exports, this difference must be financed, and this financing comes mainly from abroad, whether through loans or capital flows (IMF, 2023).
Data indicates that Turkey’s external debt exceeded $527 billion in 2025, a level reflecting the scale of dependence on external financing (CEIC Data, 2025). However, the significance of this figure lies not only in its size but in its structure. The bulk of this debt falls on the private sector, including banks and companies, which distributes risk across the economy rather than being confined to public finances.
A significant part of this debt is characterized as short-term, with estimates indicating that obligations due within one year exceed $200 billion, meaning the economy continuously relies on refinancing, not just initial borrowing. This places it in a permanent state of linkage to the movements of international financial markets (World Bank, 2025).
Here, the ring we began tracing is completed: growth generates demand, demand widens the deficit, the deficit requires financing, and financing is achieved through debt.
Thus, debt does not become a subsequent result of growth but part of its structure. That is, the economy does not grow despite debt, but through it, or at least with its continuous support. However, this pattern carries a high degree of fragility within it. The economy’s dependence on refinancing means its stability no longer depends only on its internal performance but on external factors, such as global liquidity levels, international interest rates, and investor confidence (Rodrik, 2008).
If global financial conditions tighten or investor risk appetite declines, financing this debt may become more costly or more difficult. At that point, debt transforms from a tool supporting growth into a source of pressure on the economy.
Moreover, the fact that a large part of the debt is denominated in foreign currencies increases the economy’s sensitivity to exchange rate fluctuations. As the lira depreciates, the cost of servicing debt rises, placing additional pressures on companies and banks, which may reflect on overall economic activity (IMF, 2024).
In this context, the Turkish economy becomes based on a delicate balance: as long as the ability to refinance continues, growth can continue, but any disruption in this ability may reveal the fragility inherent in this model.
This reinforces the idea that the article traces: external debt is not merely a result of the deficit but the mechanism that allows this pattern of growth to continue.
Reserves and Supported Stability
Given the widening trade deficit and increased reliance on external financing, one might expect the Turkish economy to face sharp pressures on its monetary stability. However, what draws attention is that these pressures do not always turn into open crises, raising a fundamental question about the mechanism through which this balance is maintained.
Here, the role of the central bank’s foreign reserves emerges as a pivotal element in managing stability. These reserves have seen a notable increase in recent years, approaching levels ranging between $170 and $200 billion in some periods (CBRT, 2025). These figures give an impression of a comfortable margin of safety and the ability to face external shocks.
However, this impression requires some caution in interpretation. Reserves in the Turkish case do not only represent net assets that can be freely used, but part of them consists of short-term liabilities, including swap agreements with other central banks, meaning that part of these reserves is tied to corresponding obligations (IMF, 2024).
Furthermore, these reserves are not used only as a safety cushion but are actively employed in managing the foreign exchange market. The central bank frequently intervenes to limit the lira’s fluctuations, aiming to maintain a level of monetary stability and prevent sharp movements that could affect confidence in the economy (CBRT, 2025).
This leads to a different understanding of the nature of stability in the Turkish economy: it is not stability resulting from a natural balance between supply and demand, but supported stability that depends on continuous intervention and active management of pressures. In other words, exchange rate stability or market calm does not reflect complete structural strength but reflects the state’s ability to contain imbalances and delay their effects. This explains how the economy can continue to grow despite clear pressures on deficit and debt.
However, this pattern of stability carries within it clear limits. Continued intervention requires resources and depends on the continued confidence in the central bank’s ability to maintain this balance. If external pressures increase or financial flows decline, maintaining this stability may become more costly or less effective (World Bank, 2025).
Moreover, continuous reliance on using reserves may lead to their gradual depletion, or to increased dependence on short-term instruments to compensate for the shortfall, which deepens the nature of fragility rather than reducing it.
In this context, the picture we have been building is completed: growth creates a deficit, the deficit needs financing, financing creates pressures, and these pressures are contained through reserves.
Thus, reserves do not eliminate imbalances but contribute to managing them and containing their effects, and this is what makes stability in the Turkish case not a result of solving problems but of managing them continuously.
Monetary Policy and Political Cycles
After tracing the relationship between demand, deficit, debt, and reserves, it becomes difficult to understand the behavior of monetary policy in Turkey merely as a technical response to traditional economic indicators. Changes in interest rates, and the shift between easing and tightening, cannot be fully explained within a purely economic logic, but require considering the political context within which these policies operate.
In recent years, monetary policy in Turkey has witnessed clear shifts. In the period preceding the 2023 elections, an expansionary monetary policy was adopted, represented by lowering interest rates despite high inflation rates. From a traditional economic perspective, this approach seemed contrary to the rules linking high inflation to the need to raise interest rates.
But placing these policies in their broader context changes their interpretation. Lowering interest rates helped stimulate domestic demand and support economic activity, which was reflected in continued growth. That is, monetary policy was used not only as a tool to control inflation but as a means to maintain growth at a politically and economically sensitive moment (IMF, 2024).
However, this approach was not without cost. Inflation rates rose to high levels, exceeding about 75 percent in 2024, after having been above 60 percent in 2023, reflecting the scale of pressures resulting from this pattern of policies (IMF, 2024). Pressures on the exchange rate also increased, leading to a depreciation of the lira in multiple periods.
After the elections, monetary policy witnessed a clear shift towards tightening, as interest rates were raised to high levels exceeding 40 percent, in an attempt to contain inflation and restore a degree of monetary stability.
This transition from easing to tightening does not merely reflect an economic correction but reflects a broader pattern in economic management, where demand is stimulated in certain periods, then later restricted to address the resulting effects. This intersects with what the literature refers to as the concept of political business cycles, where economic policies are influenced by political timing, especially during election periods (Nordhaus, 1975; Alesina et al., 1997).
In the Turkish case, this overlap is clearly evident. Maintaining growth before elections acquires particular importance, given its role in supporting social and political stability. After elections, the need arises to address the imbalances that accumulated during the expansionary period, especially in inflation and the exchange rate.
Thus, monetary policy does not operate in a vacuum but within a delicate balance between economic objectives such as price stability and political objectives such as maintaining growth and social stability. In this context, fluctuation in monetary policy becomes part of the mechanism for managing this balance, and not necessarily evidence of a lack of discipline.
But this pattern carries within it a clear paradox. While monetary expansion helps support growth in the short term, it contributes to creating inflationary pressures and imbalances that later require more restrictive policies. That is, monetary policy becomes part of a continuous cycle of stimulus followed by correction.
Here, the picture built throughout the article is completed: growth is stimulated through demand, demand generates imbalances, imbalances are contained through monetary policy, then growth is stimulated again. Thus, monetary policy in the Turkish case cannot be understood only through its stated objectives, but through its role in managing this cycle. It is not merely a tool for adjusting the economy but a tool for maintaining the continuity of the growth model itself.
Who Benefits from This Growth?
Thus far, the analysis has focused on how growth works in the Turkish economy in terms of its relationship with demand, deficit, debt, and reserves. However, this picture remains incomplete without asking a fundamental question related to the distribution of this growth: who benefits from it and who bears its cost?
Economic growth is not distributed equally but reflects a specific pattern of resource and opportunity distribution among sectors and social groups. In the Turkish case, it is clear that demand-driven growth creates an unequal distribution of gains.
First, sectors directly linked to demand stimulation benefit, foremost among them the construction sector. This sector represents one of the main drivers of economic activity and benefits from credit expansion, public spending, and major projects. Banks also benefit from this pattern of growth, as credit expansion increases their role and profits in the economy.
There is also clear benefit for companies linked to government projects and major contracts, which have a higher ability to access financing and economic opportunities, reflecting the nature of the relationship between the state and the private sector in this model (Bugra and Savaskan, 2014).
Additionally, segments of the middle class benefit from credit expansion, especially in consumption and real estate, which helps create a feeling of continued economic activity even in the presence of macroeconomic imbalances.
But in return, this growth is not cost-free. High inflation, which exceeded 75 percent in 2024, erodes purchasing power, especially for those with fixed or limited incomes, meaning a large part of society bears the cost of this growth indirectly (IMF, 2024).
Imbalances also appear on a geographical level. Economic activity is heavily concentrated in major cities and regions more integrated into the economy, while other regions remain less benefited by this growth, including areas with a Kurdish majority, where investments and infrastructure are relatively weaker (World Bank, 2019).
This disparity reflects not only economic differences but the nature of the model itself, which tends to direct resources towards sectors and regions that yield quick returns, rather than long-term investment in balanced development.
In this context, growth becomes part of a political and social balance. It aims not only to increase output but to maintain a specific pattern of distribution of gains, ensuring the continuity of growth and limiting disturbances.
Here, an additional paradox emerges: growth reflects not only the strength of the economy but also how its gains and losses are distributed. Therefore, growth in Turkey cannot be understood in isolation from this distributive dimension, where the economic, social, and political intertwine in shaping this model.
The Paradox of Performance and the Limits of Sustainability
In light of the above, the Turkish economy cannot be understood through growth indicators alone, nor can it be judged only by the size of imbalances. The Turkish case reveals a more complex model, based on the coexistence of growth and fragility.
The analysis has shown that growth in Turkey is not achieved despite imbalances but through their management. Domestic demand is used to drive economic activity, the trade deficit is financed through external flows, debt is continuously rolled over, while reserves and monetary policy are used to contain the pressures resulting from this process.
This can be described as the performance paradox: an economy achieves continuous growth, but does so through mechanisms that increase its fragility in the medium term.
Each element supporting growth carries within it pressures that later appear in the form of inflation, deficit, or currency depreciation. Yet, these pressures are contained through other tools, allowing growth to continue without addressing its roots.
This intersects with broader discussions in the Turkish political economy literature, indicating that the continuation of growth coincided with the persistence of structural imbalances in the external balance and production structure, raising questions about the sustainability of this model (Parlar Dal, 2020).
In the short term, this model appears capable of continuing, especially given continued capital flows and the state’s ability to manage stability. But in the medium term, its limits become clearer, with rising debt, persistent deficit, and increasing dependence on external financing (IMF, 2023; World Bank, 2025).
In this context, the real challenge is not achieving growth but redefining it. That is, moving from a model based on stimulating demand and managing imbalances to a model that enhances productive capacity and reduces external dependence.
In the end, the question is not whether the Turkish economy is growing, but the nature of this growth and its limits. Growth is possible, and may continue, but it is not necessarily sustainable.
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