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Turkey’s anti-democratic crackdown is damaging its economy

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The Economist

Mar 25, 2025 08:19 AM IST

Behind the scenes, Turkey’s authorities are going to great lengths to shield the economy from the country’s biggest political earthquake in years.

IF YOUR ONLY source of information were market data, you might think a measure of calm had returned to Turkey this week, after the chaos caused by the arrest on March 19th of Ekrem Imamoglu, the mayor of Istanbul. The country’s stockmarket index rose by 2.8% on March 24th after plummeting by 16.3% in the three days following Mr Imamoglu’s detention. The Turkish lira seems to be getting back on its feet, too.

People shout slogans as they march to protest against the arrest of Istanbul Mayor Ekrem Imamoglu, in Istanbul, Turkey, (AP Photo/Khalil Hamra)(AP) PREMIUM

People shout slogans as they march to protest against the arrest of Istanbul Mayor Ekrem Imamoglu, in Istanbul, Turkey, (AP Photo/Khalil Hamra)(AP)

But there is no calm to be seen on the streets of Turkey’s biggest city. Protests have continued for six days in a row, despite a ban on public gatherings. Over 1,100 people, including ten journalists, have been detained. Tens of thousands turned up at a rally in front of Istanbul’s town hall on March 23rd after a court remanded Mr Imamoglu in custody.

Many more protested at the ballot box. At a primary held the same day, nearly 15m voters backed Mr Imamoglu as the opposition Republican People’s Party (CHP) candidate in the forthcoming presidential elections, the party announced. Turkey’s president, Recep Tayyip Erdogan, the man widely believed to be behind Mr Imamoglu’s arrest, seems unfazed. “Stop disturbing the peace of our citizens with provocations,” he said on March 24th.

Behind the scenes, Turkey’s authorities are going to great lengths to shield the economy from the country’s biggest political earthquake in years. Turkey’s capital-markets regulator has banned short-selling on the stockmarket. And in only three days last week, the central bank is estimated to have burned through up to $26bn of foreign-currency reserves to prevent a major run on the Turkish lira.

Over the past couple of years Turkey’s economic team, headed by Mehmet Simsek, the finance minister, has managed to reverse some of the havoc Mr Erdogan’s previous policies had wreaked on the economy. In the run-up to a general election in 2023 Mr Erdogan focused on boosting growth, keeping interest rates low no matter how severe the consequences for inflation and the exchange rate. Under Mr Simsek the government has cut spending and curtailed increases to the minimum wage. The central bank dramatically increased interest rates and replenished its formerly depleted reserves of foreign currency, to some $97bn.

This has delivered results. Foreign and local investors have flocked to the lira, whose depreciation has continued but at a much slower clip. Inflation, which approached triple digits in 2022, has dipped to a mere 39%, allowing the central bank to go ahead with cautious rate cuts.

But the magnitude of the new crackdown, which has seen Mr Imamoglu, the mayor of Istanbul since 2019, and dozens of others sent to prison, has pulled the rug out from under Turkey’s reformers. “Many foreign investors bought into the shift towards orthodox policies,” says Piotr Matys of InTouch Capital Markets, a financial-analysis firm. “Their confidence has been seriously shaken.”

The central bank has the means to defend the lira in the short term, and a green light from Mr Erdogan. But down the line, the bank might have to pause or reverse its easing of rates to protect the currency and avoid a new surge in inflation. That medicine would be hard for Turkey’s leader to stomach. Continued protests and brutal repressive measures by Mr Erdogan would further shake confidence in the economy. Ordinary Turks may end up paying the price for Mr Imamoglu’s arrest. The demonstrations show no sign of slowing. That suggests Mr Erdogan may pay one as well.

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