Turkish Firms Confront Surge of Closures Amid Economic Reckoning

By Ceyda Caglayan and Ezgi Erkoyun

CORUM, Turkey – Dogan Duman faces an uncertain future for his garment factory in central Turkey. After laying off a third of his workforce to manage escalating costs, he struggles to see how his factory can remain operational much longer. Idle sewing machines line the factory floor in Corum, while “For Sale” signs and padlocked gates are common sights in the city’s once-thriving industrial sector.

These troubling scenes are becoming increasingly common across Turkey as the country grapples with the impact of a year-long tightening of economic policies, including a 50% benchmark interest rate aimed at curbing rampant inflation and excessive demand.

Many manufacturers, including Duman, who produces coats and jackets for a prominent global fashion brand, are affected by inflation that exceeded 75% earlier this year, the depreciating lira, rising electricity and gas costs, and declining export orders. “The orders are shrinking daily because we are losing our competitiveness… and I think they will shrink even more,” said Duman, whose company, now operating at 60% capacity, employs 210 workers.

As one of the top five garment manufacturing countries globally, Turkey is a significant supplier for leading European brands. However, Duman highlights that increasing energy, labor, and foreign exchange costs leave his business unable to compete against rivals in places like Vietnam and Bangladesh. “Considering the current lira exchange rate and the expected further rise in minimum wage next year, I think we won’t be able to compete,” he stated. “We will be at a point of shutdown.”

Turkish households and businesses are now experiencing the consequences of substantial rate hikes—a cumulative increase of 41.5 percentage points since June of last year—intended to combat persistent inflation, which recently dipped to 52%. The government’s dramatic change in policy, including fiscal measures, seeks to move past years of soaring prices and currency depreciation under President Tayyip Erdogan’s earlier strategy of monetary easing for growth stimulation.

With credit becoming increasingly inaccessible, and the lira depreciating at a slower pace than local price rises, companies, particularly those in apparel and textiles, are under severe pressure. The Union of Chambers and Commodity Exchanges of Turkey reported nearly 15,000 company closures in the first seven months of the year, marking a 28% increase compared to 2023.

Evidence of potential financial distress is also surfacing, with a monitoring agency noting that 982 companies sought initial court protection from debt in the first eight months of the year, nearly double the previous year’s figure. Most of these requests came from firms in construction and textiles seeking to suspend debt repayments or initiate bankruptcy proceedings.

This strain on companies creates a ripple effect, causing delayed payments throughout the economy and increasing unemployment rates. “There may be heavy costs,” warned Erdal Bahcivan, chairman of the Istanbul Chamber of Industry. “In trying to save a company, dozens of creditor firms may end up in dire straits.”

Some economists predict that given the aggressive measures implemented to control inflation, a rise in unemployment and bankruptcies is nearly inevitable. “This is a serious dilemma for the government,” said Seyfettin Gursel, director at the Bahcesehir University Center for Economic and Social Research. “It is trying to put the monster it created back into its lair, but doesn’t know how to do it.”

In Corum, situated 500 kilometers east of Istanbul, many factories exhibit signs of neglect, including broken windows, with one site littered with colorful garments left out in the rain. Bulent Demirci, co-owner of a yarn factory with 50 workers, recently shut down operations due to an “unpredictable economic outlook.” “In the past, we had production cuts from time to time, but this time it is all doom and gloom,” he remarked.

The recent increase in the minimum wage to 17,002 liras has compounded challenges for manufacturers, up 100% from the previous year and 500% since the end of 2021, when Turkey faced a significant currency crisis. Simultaneously, gas and electricity prices have surged by sevenfold and threefold, respectively.

Currently, Turkey’s production costs are approximately 40% higher than in competing Asian countries when measured in dollars, according to exporters who also cite financing hurdles and decreased working capital as major obstacles. Exporters are advocating for further currency depreciation since local inflation is running at 32%, while the lira has only fallen 13% against the dollar this year. Nevertheless, authorities have encouraged maintaining lira holdings, supported by elevated deposit rates.

Companies like Mega Polietilen and 3F Tekstil have sought court protection from their debts. An executive at 3F, who wished to remain anonymous, shared that this measure was essential for survival amid struggles to keep operations going and continue supplying major fashion brands. “But our suppliers and those who have receivables will suffer more in this process,” they noted, affecting about 10,000 workers in outsourced manufacturing across the nation.

“When interest rates soared to 60-70%, companies could not bear it. They cannot manage their debt,” the executive stated. “Businesses have paid the price for high inflation in Turkey.”