Current Account Deficit Problem in Turkey

Thanks to the global liquidity abundance experienced after 2002, Turkey has achieved a high economic growth rate based on foreign debt and capital flows. However, this process brought along a rapidly increasing current account deficit. This problem has been discussed more often in public, especially in recent years, because the country has begun to have difficulties in financing the current account deficit.
In theory, many factors may be among the causes of the current account deficit such as GDP growth rates, international trade agreements, exchange rates, interest rates, inflation rates, the tendency of types of loans, domestic saving rates, total money supply, money stock, and domestic-external debt balance. These can be categorized as the main factors. There are also structural factors such as production and export based on imports, low technological production, and low domestic savings. So, which of these factors are meant to explain the situation in Turkey?
 
The first factor to explain Turkey's current deficit is the economic growth model the country. Simplifying, it can be said that the Turkish economy has a growth model that produces a current account deficit. In years when the GDP growth rate is high, the current account deficit is also high in the negative direction. This is an indicator that strengthens the arguments that the Turkish economy is an economy based on foreign capital flows.
 
Another factor affecting Turkey's current account deficit is the foreign trade balance. This parameter simply shows the relationship between exports and imports and the Turkish economy has not been able to give a trade surplus for many years. The foreign dependency on production and exports is the main factor in this. Because when Turkey wants to increase its production and exports, there is always a rapid rise in imports. Accordingly, although industrial goods take the first place in exports, imports mostly consist of raw materials and intermediate goods. In short, Turkey has an export and production system based on imports.
 
The inflation rate is one of the burdens on the Turkish economy. The country already had a chronic inflation problem. However, especially since 2017, the control of inflation has been lost. This situation causes serious damage to the current account balance in the financial sector and the real sector. The damage caused by the real sector arises from the increase in imports as a result of the constant increase in the prices of domestic products compared to the prices of foreign products. Moreover, inflationary pressures mean less long-term financial activity. Intermediaries will lend less and allocate money less efficiently in high-inflation economies, resulting in smaller and less liquid equities markets. As a result, high and uncontrollable inflation rates are one of the obstacles to Turkey's healthy and sustainable (i.e. without creating a current account deficit) growth.
 
Further, real interest rates directly affect the current account deficit. Turkey applied a hot money attraction policy with high real interest rates, especially after 2001. These hot money inflows created an abundance of foreign currency in the domestic money market, causing the TL to be overvalued against foreign currencies. The abundance of foreign exchange caused by speculative capital inflows encouraged imports and led to foreign trade and current account deficits.

R.A.Demet TAÇ