With the vaccination rate reaching 85 percent in Turkey4, the impact of COVID-19 weakened, and daily life and economic activities continued to normalize throughout the year. Accordingly, the economy, which grew by 7.3 percent in the first quarter of the year, showed significant growth of 21.9 percent in the second quarter. Third and last quarter growth rates were recorded as 7.5 percent and 9.1 percent, respectively. With the annual growth reaching 11 percent, the 5.8 percent target envisaged in the 2021-2023 Medium Term Program has been exceeded.

As a reflection of the economic recovery seen throughout the world, increases were recorded in industrial production and employment. However, the Turkish economy was hit by the significant depreciation of the Turkish lira and high inflation in 2021.

In order to relieve the low-income group most affected by high inflation, measures such as exemption of the minimum wage from income and stamp tax were applied - considering that approximately 42 percent of registered workers are subject to the minimum wage.

On the other hand, the consumer confidence index, which rose to 86.7 points in March, declined continuously until the end of the year and fell to 68.9 in December due to high inflation and the depreciation of the lira.

While the economic confidence index was 97.2 points in December 2019, it dropped to its lowest level of 58.4 points in April 2020. Although the economic confidence index, which closed 2020 with 86.4 points in December, rose above 100 points for a short time with the normalization process, it closed the year at 97.6 points.

In 2021, Turkey’s credit rating was announced by Moody’s as B2, as in the previous year. Moody’s had changed Turkey’s credit rating from B1 to negative at the end of 2019 and announced its new credit rating as B2. In addition, Turkey has been rated at the “non-investable-speculative” level since January 2017 by Moody’s, Standard & Poors (S&P) and Fitch.5

The current account deficit, which was $36.7 billion in 2020, stood at $14.9 billion by the end of 2021. In 2021, the foreign trade deficit decreased by 7.5 percent to $46.13 billion.

In 2020, the current account deficit was at the level of $36.8 billion dollars. In 2021, the current account had a deficit of $14.88 billion. Budget revenues increased by 36.8 percent in 2021 compared to the previous year and reached TRY 1.40 trillion, while budget expenditures increased by 32.9 percent to TRY 1.60 trillion. Thus, the central government budget deficit increased by 9.7 percent and was recorded as TRY 192 billion.6

In 2021, tax revenue collection increased by 39.8 percent and reached TRY 1.1 trillion. The realization rate of tax revenues according to the budget estimation was determined as 126.2 percent.

As of December 31, 2021, the central government gross debt stock was TRY 2.7 trillion. The TRY 933.2 billion of debt stock consisted of Turkish lira debt, and TRY 1.8 trillion consisted of foreign currency debt.7

The foreign trade deficit, which was at the level of $49.88 billion in 2020, marked by the epidemic, decreased by 7.5 percent to $46.13 billion in 2021.

According to the general trade system, in the January-December period of 2021, exports increased by 32.8 percent compared to the same period of the previous year and reached $225.29 billion, while imports increased by 23.6 percent and reached $271.42 billion. While the ratio of exports to imports was 76.7 percent in the January-December period of 2020, it increased to 82 percent in the same period of 2021.

Germany took first place in exports in the January-December period. While exports to Germany were $19.32 billion, it was followed by the USA with $14.72 billion, the UK with $13.7 billion, Italy with $11.48 billion, and Iraq with $11.13 billion. Exports to these first five countries accounted for 31.2 percent of total exports.

In the January-December period, China took the first place in imports. While the imports from China was $32.24 billion, it was followed by Russia with $28.96 billion, Germany with $21.76 billion, the USA with $13.15 billion, and Italy with $11.56 billion. Imports from these first five countries constituted 39.7 percent of total imports.

Seasonally adjusted unemployment rate was 11.2 percent in 2021. The employment rate, which was 49.1 percent in December 2020, increased to 52.9 percent as of December 2021.8

The depreciation of the Turkish lira in 2021, which is much higher than that of all developing countries, and high inflation left their mark on the Turkish economy.

The CPI, which was at the level of 14.6 percent in December 2020, rose to 36.08 percent as of December 2021, the highest rate recorded since September 2002. Inflation across OECD countries reached 6.6 percent, the highest level in the last 30 years.9 This was mainly due to the increase in energy and food costs. However, inflation in Turkey was recorded much higher than the OECD average. This was due to the fact that unorthodox fiscal policies caused the Turkish lira to depreciate significantly.

Although the Central Bank first increased the policy rate, which was 17 percent in January 2021, to 19 percent as of March, it gradually decreased it from September to 14 percent in December, in line with the government’s assumption that “High interest rates are the cause of high inflation”. Along with the changes in the Central Bank’s management throughout the year, the policy of lowering interest rates was effective in the depreciation of the Turkish lira. The Turkish lira depreciated by 44 percent against the dollar, showing its worst performance in the last 20 years.

As a result of the Central Bank’s interventions in the exchange rate, as of December 31, 2021, the net foreign exchange reserves of the CBRT decreased to 8.3 billion dollars, which is the lowest level recorded since August 2002. Excluding swaps, net reserves decreased to minus $56.4 billion.10

In order to prevent the dollarization seen with the increase in the exchange rate, on December 20, 2021, the CBRT announced that in case the foreign exchange deposit accounts and participation funds in US dollars, Euros and British pounds are converted into Turkish lira deposit/participation accounts, if the amount to be calculated over the exchange rate at the end of maturity is greater than the interest yield, the difference will be covered by the CBRT. It is estimated that approximately 8 billion dollars of deposits have been converted into deposit accounts in the period from the announcement of the incentive until the end of the year.

The Turkish economy started the year 2022 with significant uncertainties in line with the world economies.

Inflation rise continued throughout 2021, accelerating at the beginning of 2022, and the annual CPI reached 54.44 percent as of February. The continuous increase in energy prices due to the Ukraine-Russia war played an important role in high inflation. It is quite uncertain how a political tension that has not been seen on an international scale since the Cold War years will be reflected in the economy for the rest of the year. As of March, Turkey has been trying to minimize the impact of the conflict on its already fragile economy by implementing a constructive balance policy towards Russia and Ukraine, its Black Sea neighbors.

However, since the Central Bank’s instruments to intervene in exchange rates have weakened due to negative net reserves, the course of the exchange rates, which eased after the intervention on 20 December 2021, for the rest of the year is uncertain.