OECD Economic Surveys: Türkiye 2025

The fast economic growth over the last decade will be harder to sustain as Türkiye will no longer be able to rely on its traditional drivers through factor accumulation. Moreover, the country will face long-term challenges such as digitalisation and climate change. A credible and stable macroeconomic stance coupled with structural reforms will be key to achieve the next step in Türkiye’s economic convergence.

Türkiye has been one of the fastest-growing economies in the OECD over the past decade, with an average annual growth rate of 4.9%. The living standards of the Turkish population have increased approximately fourfold. Labour market and social outcomes have improved significantly. The labour force participation rate for the population aged between 15 and 64 has increased from around 50% in 2005 to 60% in 2023, and the poverty rate has been halved. Türkiye has made progress in relatively decoupling its strong economic growth from air emissions, energy use, waste generation and water consumption.

However, significant structural weaknesses persist and the income gap with OECD countries remains large. Income inequalities are wide. The labour market outcomes of working-age women, migrants, and the elderly are weak. Türkiye's workforce skills lag those of other OECD countries, exacerbated by the emigration of high-skilled individuals. This contributes to its limited productivity and competitiveness in high-skill manufacturing and services industries. Environmental issues are preponderant as greenhouse gas emissions are still rising, albeit from low levels, and poor air quality has a large impact on the population’s health, for example.

Those structural weaknesses will hinder Türkiye’s capacity to address future long-term challenges. With population ageing, growth potential through additional labour is diminishing steadily (Figure 1). Simultaneously, shifts in labour market demand driven by technological progress and digitalisation are accelerating, and require more flexible labour and product markets in addition to adaptive skills policies. Türkiye will also face new constraints due to the significant rise in temperatures over the next decades.

Successfully pursuing economic convergence will require structural reforms. Maintaining a credible and stable macroeconomic policy is essential to foster investment and growth. Easing barriers to labour mobility and business dynamism would enable Türkiye to exploit its strong potential fully. The results would be widely shared among the population by expanding economic opportunities for all. A ramping up of the green transition would make this growth sustainable with large health co-benefits.

Economic activity is expected to moderate after years of strong growth driven by domestic demand which created large imbalances and challenges to long-term sustainability. The new restrictive setting of monetary and fiscal policies has helped to stabilise financial markets, boosted confidence, and reduced uncertainty. To fully leverage the improving international sentiment, authorities should maintain prudent macroeconomic policies until inflation is firmly on track to meet targets.

The economy grew by 5.3% in 2022 and 5.1% in 2023, driven by expansionary fiscal and monetary policies. These boosted consumer spending growth to record levels. However, these policies also led to significant imbalances, including rising inflation, a widening current account deficit, negative net international reserves, and a large depreciation of the Turkish lira.

Following the May 2023 elections, the policy mix has started to normalise. The new government has taken necessary steps to stabilise the macroeconomic framework and pull Türkiye’s economy back on to a sustainable path. The Central Bank has gradually raised interest rates by a cumulative 41.5 percentage points, reaching 50% in March 2024, and the government is planning a fiscal consolidation for the coming years.

Economic activity is expected to moderate over the next two years (Table 1). Tighter financial conditions, and restrictive monetary and fiscal policies, are likely to curb household consumption. Investment and government spending are also expected to weaken, particularly as post-earthquake reconstruction efforts wind down. However, exports are projected to gradually improve, supported by a better external environment.

Maintaining tight monetary policy and fiscal discipline will be essential until inflation is firmly under control. Strengthening fiscal discipline will require structural reforms to improve spending efficiency, expand tax revenues, and promote inclusive growth.

The efficiency of public finances should be strengthened. Comprehensive and transparent expenditure reviews integrated into the budget process can improve spending efficiency and increase fiscal space. Although public revenues rely comparatively more on less-distortive consumption taxes, the consumption and income tax bases could be broadened, and the structure of value-added tax rates could be simplified.

Public finances could become more redistributive. The tax and benefit system barely reduces inequalities in market incomes. Non-pension social benefits are very low, and revenues heavily rely on flat social security contributions instead of a progressive income tax. To reduce income inequality, it will be crucial to expand both the coverage of income taxation and the social safety net.

Female labour force participation improved, but still remains significantly lower than in other OECD countries, with women also facing higher unemployment rates than men (Figure 2). The underutilisation of women’s talents limits Türkiye’s economic potential. Closing the gap between men and women could increase long-term GDP per capita growth. Doing so requires a combination of tax policies, expanding pre-school education facilities and promoting more equitable family policies.

A disproportionate share of unpaid care and domestic responsibilities is a major barrier to women’s labour market participation. Motherhood particularly affects women’s workforce engagement in Türkiye, where 96% of mothers act as primary caregivers while only 2% of fathers do. Improving access to early childhood education and care (ECEC) is an essential part of this challenge.

Expanding public investment in ECEC could increase capacity and affordability. In recent years, most ECEC facilities in Türkiye have operated near full capacity. Public funding for ECEC, at 0.3% of GDP, is significantly below the OECD average of 0.8%. Employer-provided childcare remains rare. Additionally, the lack of transportation and meal services in public ECEC programs adds extra costs for families, making childcare less affordable. Expanding the supply of high quality ECEC should be a priority as it remains inaccessible for many low-income households, who would benefit the most.

Promoting more equitable family policies could support greater workforce participation for both parents. Türkiye does not currently offer non-transferable parental leave reserved for fathers. Rigid employment structures such as strict full-time requirements, fixed hours, and limited opportunities for remote or part-time work, fail to accommodate the needs of women who require adaptable working conditions due to caregiving roles. In addition, some labour regulations can be eased as they can unintentionally act as a barrier to female labour participation. For example, granting severance pay to women resigning upon marriage increases the long-term cost for employers.

Türkiye’s tax policies do not favour the labour force participation of parents by imposing a high tax wedge. Türkiye does not provide child-related fiscal benefits in contrast to most OECD countries. Providing targeted tax credits or cash benefits for parents would promote labour force participation especially among women of low income.

Greenhouse gas emissions are relatively low, but current policies are insufficient to reach the 2053 net zero target. Achieving the country’s goal will require implementing carbon pricing as planned and a transition away from coal. Rising temperatures due to climate change are weakening the decarbonisation capacity of Türkiye’s forests, particularly by increasing the risk of wildfires.

Türkiye's emissions trajectory is not in line with the country’s 2053 net zero target and requires continuing improving the policy framework. Although emissions per capita are low, they are increasing fast, and are expected to peak only by 2038 (Figure 3). This is partly explained by economic growth, but also by the relatively slow decarbonisation of energy supply. A detailed, long-term sectoral breakdown of emissions reduction plans and targets is needed and should be accompanied by a comprehensive Climate Law. In that context, the draft Climate Law introduced in Parliament in February is a step in the right direction.

Reducing emissions will require carbon pricing. Türkiye is pricing carbon only indirectly for example through fuel taxes, and at low levels. It needs to follow up on the implementation of an Emissions Trading System and transition away from its fossil fuel subsidies. Revenues are expected to be sufficient to support the required investments for the transition, help groups requiring targeted policies, and reduce other distortive taxes.

Coal-fired power needs to be phased out, and Türkiye needs to expand and green its electricity generation. Coal fuels 30% of total energy supply and more than a third of electricity. A majority is imported. In addition, more than a fifth of electricity is generated by natural gas. Shifting from coal to renewables would lower costs, reduce energy dependency, and tackle air pollution. However, support will be needed for workers and regions which are highly dependent on the industry.

Better forest management would enhance the capacity of forests to reduce emissions and address wildfire risks. Türkiye’s forests have degraded and are absorbing a smaller share of emissions. Recent wildfires have contributed to the trend, and climate change will amplify the risks. Subsidies and regulatory support for preserving forests and for wildfire prevention are needed. Broadening insurance coverage would make the exposed population less vulnerable to wildfire risks.

The Turkish economy remains specialised in medium-technology sectors, and needs to boost competitiveness in high-skilled manufacturing and services (Figure 4). Upward integration in global value chains will require technological progress, workforce upskilling, and reducing barriers to business dynamism to enable companies to gain a competitive edge in international markets. Türkiye will need to improve adoption of innovations among firms by encouraging better research-business collaborations.

Despite recent progress, the performance of the innovation system still lags that of the country’s OECD peers. One third of Turkish companies reported introducing an innovation in 2018-2020, compared to around half on average in the OECD. Similarly, Türkiye's performance in other intellectual property indicators, such as trademarks and design applications, is lower than the EU average.

Türkiye needs to boost homegrown innovation. Public support to R&D is at the OECD average but needs to become more targeted and efficient, in particular through unified programme evaluations. More needs to be done to promote links between research activities and broader technology adoption, as today there is limited diffusion of new technology among Turkish companies. Financial support to research-business collaboration and performance contracts in higher education institutions would also help improve diffusion.

The labour force requires upskilling. While participation in tertiary education has increased significantly, Türkiye lags other countries in its human resources. Providing more information and incentives for universities should tackle mismatches between graduates and labour demand. Reducing barriers to participation in high-quality lifelong learning would improve the employability of older adults. Pursuing recent initiatives to attract talented citizens back home would also boost skilled labour supply.

Significant barriers to business dynamism could be lifted. Hurdles remain to firm creation. The administrative burden on existing firms is heavy. The conduct of professional services activities is among the most regulated in the OECD, and hampers productivity along the value chains. Easing existing restrictions and regulations in services, including limits to foreign participation, would boost business dynamism, and services exports and FDI. The recent improvements in simplifying the insolvency regime should also be continued to facilitate business renewal.