Turkey’s crisis-hit economy ducked a major contraction in 2020 thanks to a lavish loan stimulus that spurred a relative recovery in the second half of the year. The reversal, however, did not come without a price. Official figures show an alarming increase in the public debt burden despite the celebratory air in Ankara.

The COVID-19 pandemic undermined the economies and public finances of countries around the world last year, but Turkey’s economy was already fragile and its public deficits were already on the rise when the coronavirus arrived.

The Turkish economy contracted nearly 10% in the second quarter as lockdowns paralyzed business activity, hitting the government's tax revenues hard. The reopening — backed with temporary levers such as cheap and abundant credit and moves to suppress foreign-exchange prices — resulted in economic growth of nearly 7% in the third quarter. The recovery continued in the fourth quarter under the accumulated impact of the loan stimulus. Turkey was thus able to avoid a more disastrous contraction and slow the expansion of its budget deficit, but not without a heftier debt burden and contraction risks down the road. 

The public finance troubles have grown numerically as well as in terms of risk, with the central government, local administrations, social security agencies and public enterprises all faced with increasing deficits. And because of growing borrowing needs, the public debt stock is swelling anew, coupled with a sharp increase in interest rates.