Turkey’s Struggle with Inflation: Effective Policies, Limited Impact
Since June 2023, Turkey has been implementing a new economic program with one clear priority; “reducing inflation”. The reasoning is simple yet urgent. Inflation is considered one of the most destructive ailments an economy can face. It erodes purchasing power, worsens income inequality, weakens the financial system, tightens credit conditions, and fuels dollarization. If not contained promptly, it tends to accelerate—making early intervention crucial, even if it comes at a cost.
But nearly two years into the program, has Turkey made real progress?
A Stubborn Trend
In June 2023, inflation stood at 38%. Instead of falling, it continued to rise through May 2024 before returning to 38% by March 2025. While some stabilization is evident, a sharp decline is not expected. At best, the rate of decline may slow further.
The policies in place—raising interest rates and limiting wage increases—are theoretically sound, but their real-world impact has been underwhelming. The economic cost has been high, yet inflation remains persistent. This raises a critical question: why are the results so limited?
The Focus on Reducing Consumption
The government has tried to curb total consumption using two main tools:
- Raising policy interest rates
- Implementing a restrained income policy, such as limiting the annual minimum wage increase to 30%
However, data from the Turkish Statistical Institute (TÜİK) shows that these efforts have not succeeded in reducing consumption. Private consumption actually increased slightly from 59.1% of GDP in 2023 to 59.2% in 2024. Meanwhile, public consumption rose from 13% to 14.7% of GDP. In other words, not only was private consumption not reduced—it was complemented by higher government spending.
Why Consumption Isn’t Falling
According to experts, several structural challenges unique to Turkey are weakening the effectiveness of demand-reducing policies:
1. Inequality in Income Distribution
In a country with unequal income distribution, general consumption-cutting measures are only partially effective. If most citizens belonged to a middle-income group, a broad-based policy could reduce consumption across the board. But that’s not the case.
TÜİK data shows that income distribution has worsened, especially to the detriment of the middle class. For simplicity, if society is divided into just the “rich” and the “poor”:
- The poor already spend at subsistence levels and cannot cut back further, relying on credit cards or family loans.
- The rich, with significantly higher incomes, are largely unaffected by higher interest rates or minor policy shifts.
This results in demand-side policies missing their targets on both ends of the spectrum.
2. Tourism’s Boost to Demand
In 2024, over 62 million tourists visited Turkey, spending around $61 billion. This autonomous external demand—equivalent to about 4.6% of GDP—adds pressure on prices and complicates efforts to reduce domestic consumption.
3. High Budget Deficits
One of the foundational steps to fight inflation is closing the budget deficit. A balanced or surplus budget helps reduce inflationary pressures from the public sector. Yet Turkey posted a deficit equal to 5.3% of GDP in 2023, and 4.8% in 2024—levels that actively hinder inflation reduction.
4. Inefficient Taxation Methods
Taxes, when poorly designed, can unintentionally drive up inflation. Ideally, taxes should be levied on profits or added value after economic activity occurs. When taxes are imposed at intermediate stages—such as on savings or investment—they increase production costs, distort prices, and discourage growth.
For example, taxing a farmer on seeds rather than on the harvested grain can reduce output and hurt both the farmer and the state. The lesson? Timing and method of taxation matter, especially during inflationary periods.
What’s Next?
Turkey’s economic team is aware that structural inefficiencies are undermining the effectiveness of current policies. The challenge now is to enhance policy efficiency without worsening the social and economic toll.
A broader, more inclusive strategy—possibly involving fiscal reform, targeted support, and structural adjustments—may be required to tame inflation in a sustainable way.
Source: Original article by Emre Alpan INAN on EKONOMIM.com
Translated by BTT
