Will Current Account Deficit Problem be Solved? 

Turkey’s current account deficit has already passed beyond the danger zone and dependence on hot money still continues. Although economic circles do not predict a crisis to be caused by the current account deficit, there are increasing warnings pointing to a need for taking measures.

 Current account deficit, as uniformly claimed by people from almost every sector, is “the soft underbelly of the Turkish economy.” Key players of the economy are worried about this. The relentless rise of the deficit confirms these concerns. There are both those drawing attention to the risk of crisis basing their argument on past events, and also others who say current account deficit is not a problem as long as it can be sustained. However, the general view especially after the record-high current account deficits were observed calls for urgent measures. In recent periods number of those who accept current account deficit has become a “very serious” problem, has been growing.

Economists, top-level executives and the government talk about current account deficit one after the other and the issue is touched upon in lengthy discussions in various platforms. Different views on the solution of this giant problem come from various circles. Current account deficit is a problem that is observed usually in developing countries; but this does not mean that developed countries do not have a current account deficit “problem.” Indeed, it is a nuisance for many countries and is often mentioned in the context of crises. But what exactly is current account deficit? It is better to define the balance of payments before explaining this concept. 

According to the Balance of Payments Manual prepared by the International Monetary Fund, in a general sense, the balance of payments is a statistical statement that systematically records all the economic transactions between residents of a country (Central Government, monetary authority, banks, natural and legal persons) and nonresidents for a specific time period. Balance of payments comprises the following four components: Current account, capital and financial account, net errors and omissions and the change in stock of reserve assets. Among these four components, current account and capital and financial account are quite important. While current account covers all transactions that involve real sources (goods, services, income) and current transfers; the capital and financial accounts show how these transactions are financed (by means of capital transfer, portfolio investments, credits and investment in financial instruments).

Normally, when current account deficit emerges, that is to say, when the economy is a net debtor to the rest of the world, it is investing more than it is saving and is thus using resources from other economies to meet its domestic consumption and investment requirements. In such a situation a surplus is expected to emerge in the capital and financial accounts and balance this deficit. However, when there is no surplus, foreign-exchange assets are depleted because those reserves would be used for investments abroad. Current account deficit shows domestic savings are insufficient. In this scenario, foreign savings are needed to finance the deficit. Theoretically, it is agreed that countries can tolerate a certain level of deficit; but how they finance this deficit is what really matters. 

A Brief History of Turkey’s Struggle with Current Account Deficit

Turkey has been coping with current account deficit for a long time. When the course of Turkey’s current account deficit is looked at, it is seen that in 1988, 1989, 1991, 1994, 1998 and 2001 Turkey had current account surplus. In 1993, there happened a much greater increase in current account deficit when compared to previous years. An economic crisis broke out in Turkey at the beginning of 1994. In 2000, current account deficit considerably rose reaching $10 billion. When 2001 came Turkey again had to cope with an economic crisis. These previous negative experiences also fuel worries over the future. It is because there has been a serious rise in current account deficit beginning from 2001 and the current account deficit is at record-high levels now. Consequently, the agenda is set on the causes of current account deficit and on what measures can be taken. At this point, foreign trade deficit, current account deficit, exchange rates, interest rates and hot money stand out. 

Following the 2001 crisis, Turkey entered a transformation process. After the crisis, the former exchange rate regime was left and floating exchange rate system was adopted. In this period, due to global liquidity glut investments began to tend toward new countries. Emerging countries became the new destination of these investments. Turkey came to be one of the preferred countries thanks to high interest rates, political stability and post-crisis economic conditions. In the course of time, the inflow of hot money began to influence exchange rates with the effect also of the floating exchange rate regime. Turkish Lira has appreciated against foreign currencies. Additionally, in order to reduce inflation the Central Bank has also capitalized on the appreciation of Turkish Lira as a result of the inflow of hot money. The U.S. Dollar which was exchanged at YTL 1,63 by the end of 2002 has fallen down to YTL 1,18. 

External Dependence Increases         

As exchange rates changed to the advantage of Turkish lira, imported goods began to turn cheaper. Besides, China’s flooding the global markets with its cheap goods, additional costs brought about by the increases in energy and commodity prices, and exchange rate equilibrium all combined to undercut the competitive power of domestic production to a large extent. Cheapening of imported goods has caused them to be preferred also in domestic consumption. In addition to domestic consumption, the use of imported goods increased also in production. Due to the increase in the import of intermediate goods, exports have become dependent on imports. Although exports increase, imports increase at a higher rate. The quick rise in imports overshadows the news about records in exports while foreign trade deficit continues to grow. Foreign trade deficit which was $6 billion in 2002 reached $46,6 billion in 2007. As of June 2008, however, foreign trade deficit reached $6,3 billion increasing by 63% as compared to the same month in the last year. In the first six months of 2008, foreign trade deficit came to be $28,7 billion rising by 41,3%.

Current account deficit, on the other hand, increased to $27,3 billion in January-June period rising by 41,9% when compared to the same period of the last year. Current account deficit reached $5,5 billion in June rising by 78,2% as compared to the same month of the last year. The increase was above expectations. Year-end prediction of current account deficit rose over $50 billion. The rise in current account deficit necessitates importing savings. However, it seems that these savings are not diverted to production but are spent for consumption. It means that while our domestic savings are deficient, we are also having difficulty with creating new resources by diverting imported savings into production. On the other hand, we are directly affected by increases in oil prices and similar developments since we are dependent on external resources in energy. Rising energy bill is a factor that triggers current account deficit. The real question is how long this deficit can be financed. The need for external resources, which grows in parallel with the expansion of current account deficit, renders Turkish economy vulnerable. Because current account deficit is financed with short-term foreign resources which are termed more as ‘hot money’, Turkey becomes ever dependent on hot money. 

As we have recently witnessed, hot money can instantly leave country. A crisis is inevitable in such a situation. In the Southeast Asian crisis of 1997 which began in Thailand, factors related with current account deficit stand out. Thailand’s current account deficit rose up to 8% of its GDP in 1995 and 1996. In order to finance the current account deficit, the inflow of foreign capital was promoted, but the incoming hot money could not be diverted into areas that create value added. When hot money quickly left the country, Thailand had to face the inevitable result. According to international research, when the ratio of current account deficit to GDP exceeds 4%, this means a crisis signal. Turkey has already passed beyond this border and dependence on hot money still continues. Although economic circles do not predict a crisis to be caused by the current account deficit, there are increasing warnings pointing to a need for taking measures. Experts cite the following as the steps necessary for stopping current account deficit: Promotion of the domestic production of intermediate goods that are currently imported, determining the strategies required for enabling domestic firms to compete with foreign firms, replacing  debt-driven growth with export-led growth, working toward reducing energy costs, ending the low exchange rate-high interest rate practice. Again, adoption of export-led development model is considered as a significant step towards getting rid of current account deficit. Southeast Asian countries are given as perfect examples of this model. Following the 1997 crisis, these countries could achieve a huge development thrust based on growth, exports and domestic savings. 

A Commission to be Established

Although they have previously declared that current account deficit does not pose any problem, important figures from the business world and government officials have greatly changed their approach to the issue. Views that current account deficit is at a sustainable level and hence there is no reason to get worried, have now assumed a different theme. The government takes new steps regarding current account deficit. Deputy Prime Minister and Minister of State for Coordination of the Economy Nazım Ekren said it was decided to set up a commission to deal with current account deficit. Ekren stated that the commission would comprise two working groups with one of them discussing the causes of current account deficit and the other analyzing the financing of the deficit. Representatives from  TİM (Turkish Exporters Assembly), TOBB (Turkish Chambers of Commerce, Industry, Commodity Exchanges and Maritime Chambers of Commerce), TÜSİAD (Turkish Industrialists' and Businessmen's Association) and public sector would come together in the commission and discuss the reflections of current account deficit on non-financial sector. Despite the efforts toward solving the current account deficit problem, it is impossible to obtain an effective result in the short run. For this reason, it seems we will go on facing huge deficits. Debates on current account deficit will not come to an end in a short time. However, predicting the length of this process seems to be utterly difficult.