Current account deficit and growth are not sustainable
Turkey’s current account deficit reached $4.5 billion in September, higher than expected.
The year’s total current account deficit comes to $40 billion, proving that growth in Turkey is not sustainable.
Ministers are proudly announcing how much growth we achieved this year without looking at the current account deficit and balances damaged by inflation.
The minister responsible for the widening foreign trade deficit has said: “We will break a world record with the growth achieved in the first three quarters of the year.” Widening current account deficit, which is going along with a foreign trade deficit, indicate that production in Turkey is highly dependent on imports. Therefore, a loss in the Turkish Lira’s value stirs panic because it hits the manufacturing and production sectors hardest.
As a lot of hot money flowed into Turkey in September, we can say that the effect of the current account deficit was relatively limited.
However, we are now entering a period when the influx of hot money will decrease. Namely, Turkey will need to pay a higher parity cost to finance its economic growth.
This means that today’s growth rates will go along with a much higher current account gap and parity risks.
The balance in economy happens like this: As current account deficit widens, foreign currencies’ value rise, exchange rates increase, and domestic production begins to decrease. In other words, in an atmosphere in which the hot money flow reduces, it is not possible to keep the imports that help us to grow at these high ratios. Hereby, our growth figures will automatically decrease.
Increasing domestic demand by offering cheaper loans backed by Turkey’s Credit Guarantee Fund (KGF) also has its limitations. It is unlikely to happen if you force it too much.
The reason for this is that the structure of Turkey’s production continues to go unchanged and therefore remains dependent on foreign economic structures.
Let’s repeat: The biggest mistake of Turkey’s economy management occurred in 2001, when despite the establishment of a necessary infrastructure a suitable global financial climate, we rejected some key structural reforms.
In other words, when they stopped the reforms, we, as a whole nation, started to pay the price of the current government’s mistake by not going further with the reforms. In short, after the growth figures of the year’s three quarters, which will be announced in December, we will see that they will start to decline. In any case, foreign institutions predict the 2017 growth at 5 percent and 2018 growth at 3-3.5 percent.
Aside from the fact that inflation is well above expectations, as a result of global developments, it is expected that foreign investment will decline and the government-backed surge in credit expansion will return to normal levels this year. In the International Monetary Fund’s (IMF) new Europe report, Turkey’s 2018 growth figure was announced at 3.5 percent.
In the report that drew attention to the increase in inflation and the record core inflation broke, it was stated that the monetary policy had to operate inflation in a more simple system and decrease it. The rules in economics are clear.
But will the government follow the IMF’s advice? Do you think the government will stop going in this direction when three important elections will take place in 2019?