Turkey’s Current Account Balance: A Real Problem

Turkey’s Current Account Balance: A Real Problem

July 2012

Turkeys current account balance deficit reached 77.2 billion dollars in 2011; the 2010 figure was 46.6 billion dollars. During the first four months of 2012 there has been a reduction in the deficit and the twelve month total decreased to 69.2 billion dollars. Starting with the Government, some argue that Turkey does not have a serious current account balance problem. They point to this recent reduction in the deficit, to other macroeconomic parameters and to the ability shown so far in securing the financing required for the deficit. Others see Turkeys current account balance situation and structure as a serious problem needing to be tackled vigorously so as to avoid a major negative impact on the economy, specially if external conditions deteriorate, and in any case to overcome a significant restrictive effect in the longer run on the growth potential of the Turkish economy. An examination of Turkeys current account balance in terms of its size, structure and perspective will shed light on the issue.

Turkeys 77.2 billion dollars current account deficit of 2011 corresponds to about 10 per cent of GDP. Although a same deficit ratio may represent different degrees of impact and danger to different countries, this is by any account obviously a very large percentage constituting a serious factor of vulnerability for the economy. In terms of magnitude, 77.2 billion dollars corresponds to the second highest deficit in the world after the US.

As shown in the graph below, the deficit in terms of ratio to the GDP has displayed a tendency to grow over time in the last decade. The period when the deficit was reduced, i.e. 2009, corresponds to a year of negative growth of nearly 5 per cent in Turkey following the world economic crisis. And in general periods of high growth in the Turkish economy have been accompanied by high deficits and vice versa. In 2011 the growth rate was 8.5 per cent. And the first four months of 2012 when the deficit was reduced correspond to a period of lower growth as can be inferred from the corresponding industrial production data and from leading indicators. The reduction was also aided by falling energy prices. In sum, the need to achieve deficit reduction without a matching decrease in growth is apparent.

The sources of financing of the deficit also reflect weaknesses. FDI constituted only 21 per cent of the total of 77.2 billion dollars in 2011. One billion dollars were used from the reserves. And the net errors and omissions item was as much as 11.9 billion dollars. The composition didnt improve much in the first four months of 2012 and the net errors and omissions item for this period reaches 2.9 billion dollars. This is too large an amount for such an item.

Looking at the structure of the deficit, one notices that its main source is the trade balance. Tha balance of services, goods and income was 79 billion dollars in 2011. This in turn reflects a high import dependency in the Turkish economy. The most significant aspect of this depency concerns manufacturing production for the domestic as well as export markets. According to the figures indicated recently by the Minister for the Economy this rate increased from 40 per cent in 2010 to 43 per cent in 2011. For example it is 56 per cent in automobile production, 30 per cent in the manufacture of machinery. So, even a high rise in exports does not help sufficiently toward containing the deficit. This situation reflects the need to upgrade the technology content hence the competitiveness of industry and the economy. It is also to be noted, in this context, that so far FDI has to a considerable extent opted for nontradeable sectors and this limited the benefits it brought in terms of an increase in competitiveness and export potential.
Other factors of vulnerability, specially for the forthcoming period, likely to elapse in an atmosphere of uncertainty in Europe include the rise of short term external debt which went up by 13.6 per cent between the end of 2011 and April 2012, reaching 95.2 billion dollars.

One of the main fundamental sources of a dangerously high current account deficit in Turkey is worryingly decreasing and very low saving rate. The saving rate has in fact reached as low a level as 12 per cent in 2011.

The Government is aware of the need to increase the saving rate and has recently adopted a scheme in which a sizeable public contribution is provided to new private pension accounts so as to support private savings. The declared aim of a new incentives scheme for industry introduced by the Government is to reduce the import dependency of the economy. The effectiveness of the latter will depend on sevaral factors ranging from the other parameters of the overall economic policy setting to implementation. Despite these moves the present economic policy structure is unable to ensure high growth with a reduced level of current account deficit. The trend of overvaluation of the TL is also detrimental to the current account balance. All these factors associated with a high current accounts deficit structure also impact negatively on the sustainability of the financing of development. The Governments attitude which, although a small number of its members are at times more cautious, can be summarised as follows: “Our policies are so effective that we can easily deal with any dangerous situation, so the current account balance deficit is not a serious cause for worry, and in any case it is decreasing”. This is not a reassuring stand, on the contrary it increases the vulnerability caused by the deficit.

The policy instruments needed to achieve similtaneously high growth and a low current account deficit comprise: an innovation and technological development based investment policy and pattern in line with transformation toward the knowledge economy; in a related way, a set of measures ensuring simultaneously on the one hand the mobilisation of existing vast labour resources, and on the other hand resorting substantially to knowledge intensive high technology production; upgrading the education system accordingly; raising significantly the saving rate through additional policies including in taxation; a more rules based economic governance structure (ref. my article titled “The Decree Laws of 2011: a Dangerous Course”, published in May 2012 issue of Reflections) so as to restrict rent and facilite competitiveness enhancing developments; in a similar vein, improving the quality of financing; flexible and at the same time more effective policy instruments relating to capital flows so as to restrict overvaluation; encouraging actively FDI to chose tradeable sectors and higher technology activities.

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