Due to the military interventions by the United States and Israel in Iran and Lebanon, emerging economies are experiencing financial strains: rising risk premiums, depreciation of their currencies against the dollar, and a decline in central banks’ foreign exchange reserves. As is often the case, Türkiye is once again in the spotlight due to the sharp fall in the reserves of its central bank. Foreign exchange reserves now stand at just USD 49 billion, down from USD 66 billion before the conflict began and just over USD 80 billion in mid-2025.
Recent developments in foreign exchange reserves mainly reflect outflows of portfolio investments. However, since mid-2025, there has also been a deterioration in the non-energy trade balance. This deterioration is partially explained by the positive growth differential in comparison to major trading partners, primarily the European Union, which accounts for 41% of imports and 43% of exports.
In the second half of 2025, the volume of goods exports fell very sharply, as shown in Figure 1. Conversely, European imports did not contract, and exports from the main Central European countries remained stable. Consequently, the decline in Turkish exports seems to indicate a loss of competitiveness.
The decline in competitiveness primarily pertains to cost competitiveness. This is clearly demonstrated by the trend in unit labour costs depicted in Figure 2.
Between 2019 and 2022, the average unit labour cost in euros in the manufacturing sector fell by around 30%, mainly due to the depreciation of the lira, while that of the main Central European countries remained stable. During the post-Covid period, Turkish exports grew much faster than those of Central European countries, thereby increasing their market share.
Subsequently, during the period from 2022 to 2024, Turkish wages underwent a substantial catch-up, prompted by the rise in the minimum wage, which resulted in an over-adjustment of unit labour costs relative to those of Central European countries. This scissor effect is reflected in the labour cost indices calculated by the Turkish Industrialists’ and Businessmen’s Association as well as the Istanbul Chamber of Commerce and Industry. These employer organisations compile a comprehensive cost competitiveness index that also takes into account energy costs, the cost of intermediate goods and financial costs. This index has been deteriorating since 2021, with financial costs making a significant negative contribution since 2024, as illustrated in Figure 3.
Our assumption regarding market share losses requires validation, as these are recent developments. That said, it is clear that the textile sector is losing momentum, with its export share now standing at just 11%, down from 16% in 2019. At the same time, however, the share of medium- and high-tech Turkish exports increased from 36% to 43% between 2021 and 2025. The challenge for the country is to transition towards higher value-added exports to offset the decline in market share of low value-added, labour-intensive products.
