This revision short looks at some of the Micro & Macro Effects of Turkey's Inflation & Currency Crisis

🔍 Microeconomic Effects

🛒 Loss of Consumer Purchasing Power

→ High inflation erodes real incomes, reducing consumers’ ability to buy goods and services and increasing relative poverty

→ Turkey’s inflation peaked at over 80% in 2022, causing severe hardship for millions of households - destroying the value of savings

📈 Rising Input Costs for Firms

→ A weak Turkish lira raises the cost of imported raw materials and energy, pushing up marginal costs for businesses.

→ Firms face pressure to raise prices or reduce output, hurting profitability and allocative efficiency.

🧯 Reduced Business Confidence

→ High inflation and currency volatility create uncertainty, discouraging private capital investment and innovation.

→ Firms delay spending decisions, reducing dynamic efficiency in the long run

📊 Macroeconomic Effects

📉 Exchange Rate Instability & Devaluation

→ The lira lost 60% of its value in 3 years, worsening the current account of the balance of payments (J curve) and increasing the cost of foreign debt repayments.

→ Falling lira makes tourism and other exports more competitive - but wiped out by the effects of surging inflation

📈 Sustained High Inflation

→ Currency devaluation and expansionary government policies fuel cost-push and demand-pull inflation.

→ Central bank expects inflation to remain at 36% by end-2024—well above global norms.

💷 Debt Burden & Fiscal Pressure

→ Turkey’s large external debt becomes costlier to repay in foreign currency as overseas investors demand an interest rate premium

→ Risk of debt default hurts the credit ratings of Turkish government and Turkish businesses

→ Inflation erodes tax revenue in real terms, limiting fiscal capacity and threatening macroeconomic stability.