In recent years, Turkey has been one of the fastest-growing economies in the world, even outperforming economic giants China and India.
In the second quarter of 2018, the country reported 7.22 percent growth in its gross domestic product (GDP).
Nevertheless, the free fall in the Turkish Lira of the past months, has sparked fears of an economic fallout that could spread over to other emerging markets and the banking systems in Europe.
The expansion of Turkey’s economy was fueled by foreign-currency debt. At a time when central banks around the world were pumping money to stimulate their economies after the global financial crisis, Turkish banks and companies were racking up debt denominated in U.S. dollars.
Turkish President Recep Tayyip Erdogan blamed the plunge in the currency on “an operation against Turkey” and dismissed suggestions that the country's economy was facing troubles.
To many analysts, Turkey wouldn't have gotten into the current predicament if its central bank had been left to do its job.
The Turkish economy has been “overheating” with inflation — at 16 percent in July — exceeding the central bank's target of 5 percent.
Raising interest rates could have proved to be a solution by helping to stem a massive increase in consumer prices: Higher rates tend to attract foreign investors, who would need the lira to buy Turkish assets. That could in turn support the currency, which makes imports cheaper and lessens the burden of paying back foreign debt.
But Erdogan has said he's in favor of lower interest rates to continue driving growth. His influence over the country's central bank has undermined investor confidence, experts claimed.
Turkey is not the only economy with “twin” deficits and high amounts of foreign currency debt. Indonesia, for example, also runs fiscal and current account deficits and its foreign currency borrowing is roughly 30 percent of GDP. But unlike Indonesia, Turkey doesn't have large enough reserves to rescue the economy when things go wrong.
The country's foreign currency debt now stands at more than 50 percent of its GDP, according to estimates by the International Monetary Fund.