Connection between inflation and current account deficit

Connection between inflation and current account deficit

Turkey’s high current account deficit has recently always been shown as the biggest irresolvable problem of the economy. In the years when the Turkish economy grew significantly high, its current account deficit showed a huge increase as well, having upset the economic balances. It has always been said that Turkey’s current account deficit could be narrowed only by means of various structural measures, and that the problem could not be resolved without changing the mode of production in the country. Steady and solid measures could unfortunately never be taken to maintain the existing production modes so as to narrow the current account gap.

When Turkish economy grew at around 5 percent in previous years, the economy still suffered from a high current account deficit, but not that seriously. There has not been any comprehensive report explaining the issue yet, but we have now seen that “even the lower growth rates could trigger a higher current account deficit than before” with a recent decrease in inflation rates, maybe accompanying more stable exchange rates for the last decade. For instance, Turkey has started to face seriously higher current account deficits in recent years even Turkey’s growth rate is no more than 4 percent. The significantly low saving accounts of Turkey play a crucial role here. As Turkey could not raise its savings, the country could not have its own sources to use to invest, making Turkey more dependent on foreign capital to grow.

Many did not talk about the fact of inflation for a couple of years, because the inflation rates were around 5 or 6 percent, which are very moderate in such a country, like Turkey, that experienced a very high level a decade ago. The July inflation numbers, which were announced a couple of days ago, however, show once more that Turkey could not solve its high inflation problem. We had already said no country saw inflation rates more than 5 percent for several years due to the global economic crisis, which caused a global slowdown in economic activity and decrease in inflation rates. And we had added for the last years that Turkey’s inflation rates were still higher than the global average, but we couldn’t be heard.

Turkey’s annual inflation rose from to 8.88 percent in July; namely Turkey has begun to experience again an inflation rate around 9 percent.

Central Bank Gov. Erdem Başçı had already expected higher inflation in July, and an annual inflation rate up to 9 percent. He, however, also said the inflation rate would begin to show a decrease by August. This clearly shows a lack of confidence in the markets.

Market players, mainly economists, say a decrease in the inflation rate will become less possible upon the core inflation rate in July. They note that the expectations are higher now and this will most probably affect the pricing attitudes negatively. This means that we should expect higher inflation rates.

The exchange rates will determine whether that will happen in the future or not, I believe. Turkey’s Central Bank’s reserves are not large. We could start to talk about the double-digit inflation rates in the future again when foreign capital outflow from Turkey accelerates due to the existing political and economic problems internally or global problems. This appears to be quite possible.