Recent political events in Turkey have hindered the country’s efforts to reduce inflation and have taken a toll on the economy, as well as foreign exchange reserves, according to Beata Javorcik, Chief Economist at the European Bank for Reconstruction and Development (EBRD).
The detention of Istanbul Mayor and main opposition leader Ekrem Imamoglu on March 19 caused the Turkish lira to drop sharply, triggering market volatility that led the central bank to unexpectedly raise interest rates in April, halting the easing cycle that had begun earlier in the year.
Prior to this, Turkey was on a “slow but steady” path toward reducing inflation, Javorcik said. However, the political unrest disrupted this trajectory, forcing the central bank to reverse its course and raise interest rates, which in turn slowed economic growth. “This is costly in terms of economic performance, reserves, and investor confidence,” she added.
The EBRD has revised Turkey’s 2025 economic growth forecast down by 0.2 percentage points to 2.8%, citing lower domestic and external demand, as well as tighter-than-expected monetary policy.
In the months leading up to Imamoglu’s detention, Turkey’s bonds and stock market had attracted significant attention from global investors, particularly after the appointment of Finance Minister Mehmet Simsek in 2023, who was seen as the architect of a return to more orthodox economic policies.
Simsek and Osman Cevdet Akcay, the deputy governor of Turkey’s central bank, are scheduled to speak at the EBRD’s annual meeting on Wednesday.
Following Imamoglu’s arrest, Turkey’s central bank sold more than $40 billion in foreign exchange, reducing net reserves (excluding swaps) from over $60 billion to under $20 billion. The latest reserve data published on Monday showed a $6 billion increase in Turkey’s gross reserves, marking the first gain in nearly two months.