Current balance on red alert


The current account deficit figures, a serious pressure factor on exchange rates in Turkey, have been recently announced as some serious discussions are going on on social media about the fact that the Central Bank started to operate directly with Tahtakale market for foreign exchange. The data says that Turkey’s current account balance ran a deficit of 8.78 billion dollars in February, while the 12-month current account deficit hit its highest level since 2012 with 55.4 billion dollars.

Obviously, cutting interest rates and raising exchange rates did not help Turkish economy run a surplus in the current account. What’s worse, the inflation rate did not go down either. This time, when the exchange rates were kept stable, Turkey has run a record high deficit while inflation continues to remain high. Meanwhile, January’s revised current account deficit was recorded as the highest in Turkey’s economic history, exceeding 10 billion dollars.

Looking on the bright side, in February, the current account, excluding gold and energy, ran a surplus of 834 million dollars. This “excluding energy” calculation might not be making much sense, but the “excluding gold” calculation seems quite logical to me. Meanwhile, we hear that business people are turning to gold due to the foreign currency purchase restrictions. If this is true, this must be the reason for the recent rapid increase in gold import volume.

“We Have to Import”

The truth is that the value of the goods we export is quite low compared to the goods we import. However, we need imported goods to produce. We have to do extraordinary things in order to get out of this vicious circle. Turkey’s current trade regime and exchange rate regime do not encourage exports, nor do they help increase added value, not to mention its other undesirable results such as the gradual expansion of imports and deterioration in pricing behaviour.

Let me stress an important fact, countries like Turkey, which desperately need raw materials, intermediate goods and investment goods to run their import activities, have no choice but to export high added value products. However, this is not a goal that could be achieved without making the necessary efforts. The Marshall–Lerner condition tells us that a country with high elasticity of export demand and low elasticity of import demand cannot easily become competitive and that exchange rate rises can be of limited help.

To put it simply, it is not easy for a country that is dependent on imported goods while whose exports are heavily exposed to foreign competition, to run a trade surplus. Although the increase in exchange rates in such countries is helpful in the short run, in terms of generating export revenue, it creates serious problems in the medium term, considering the pass-through effect on inflation. Sadly, the competitive advantage of the goods supplied to the global markets by an export industry, which places its hopes in exchange rate rises, can only be in the form of offering cheaper prices compared to its rivals.

As we do with all other issues, I hope that we will deal with this rationally after the elections. Otherwise, a speculative attack will be inevitable.