The national current account deficit (CAD) dropped by 31 percent to nearly touch down at $4 billion in February compared to the same month of last year, Central Bank of Turkey data showed on Wednesday.
Market observers expected a drop yet failed to see how big that drop would be. The common expectation was for a CAD of $4.6 billion for the second month of the year. The February 2011 CAD was, on the other hand, $6.12 billion. With the decline, the two-monthly gap was recorded at $10.14 billion, nearly 16 percent lower than that of the same period a year earlier.
An improvement in the direct investments account, a subheading under the current account, played the biggest role in helping the notable reduction in the CAD in the first two months of the year when Turkey's net tourism earnings remained mostly the same compared to a year ago. The investments flowing into Turkey from overseas increased by $334 million to become $1.68 billion, whereas investments Turks made abroad nosedived by 66 percent (equal to a drop of $526 million) to $271 million, producing a significantly higher surplus for the period.
“We earlier said that we have left the worst behind, and the CAD figures would slowly and gradually go down every year. This is what we are seeing now,” Deputy Prime Minister Ali Babacan, who oversees the government's economy policies as the head of its Economy Coordination Board (EKK), said after the data were announced.
Economy Minister Zafer Çağlayan appeared pleased with the latest statistics regarding the country's balance of payments. He said the CAD is set to continue shrinking in March as well. The February figure is also the lowest seen in the previous six months. “This happened as a result of both the measures taken and the increase in our export volume,” Çağlayan said in a written statement on Wednesday.
The foreign trade deficit dropped by more than one-fifth year-on-year in February. According to Turkish Statistics Institute (TurkStat) figures, the gap fell by 20.4 percent from $7.46 billion in February 2011 to $5.93 billion in the second month of this year. Exports grew by 17.1 percent to $11.77 billion, whereas imports saw a slight increase of 1.1 percent to $17.52 billion, official data show.
The reduction came as a result of a much weaker lira against major currencies the euro and the dollar -- which gave Turkish goods a price advantage in international markets, while making foreign goods more expensive domestically -- as well as the government's efforts to diversify export markets in line with its centennial goal of having $500 billion in revenue from sales overseas by 2023. A dollar was worth TL 1.59 on average in February of last year as compared to TL 1.74 this February. The euro, likewise, was also much stronger compared to the national currency, jumping from TL 2.18 in February 2011 to TL 2.33 three months ago.
The foreign trade deficit is a highly problematic issue for a country that relies on foreign supplies for nearly all of its energy needs and whose industries are also heavily dependent on foreign intermediate goods to keep their wheels turning. This gap has grown to a barely sustainable level for the country as it has outpaced almost all world nations in economic growth in the past two years.
The foreign trade deficit spiked from $39 billion in 2009 -- when the Turkish economy contracted by nearly 5 percent -- to $72 billion in 2010, when the economic growth rate was at 8.9 percent. It soared to $105 billion, or some 13 percent of Turkey's gross domestic product (GDP) last year, when the national economy grew by around 8 percent again.
The foreign trade deficit is problematic because it causes the country's foreign reserves to constantly bleed out and could eventually disrupt Turkey's balance of payments as it also leads to a high CAD. To address this issue, the central bank teamed up with the government to add monetary measures on top of the administration's fiscal measures last year.
Whereas the bank aimed to slow down credit expansion and the weakening of the lira against the euro and dollar, the government imposed higher taxes -- in the form of what is called the private consumption tax (ÖTV) in Turkey -- on certain goods such as cars and mobile phones, as well as tobacco and alcoholic beverages, to cut imports.
A new investment incentive package, which was unveiled only a few days ago, is also expected to help Turkey in its fight against its CAD while also minimizing regional development differences. According to this package, the government revised Turkey's regional development map and divided regions into six categories based on their current level of economic development and also the investment opportunities they offer.
The first category, mainly Western provinces, is the most developed, while the sixth category includes the least developed regions, particularly in the eastern and southeastern parts of the country. Businessmen will be exempt from social security employment premiums they usually have to pay for their new employees for seven to 10 years, depending on the region in which they invest. The automotive, chemical, textile and machinery sectors were named as targeted strategic investments.