This is well known. But the other side of the coin is not always understood properly. There is a popular belief that if the Central Bank of Turkey reduces nominal interest rates, the Turkish lira would not be overvalued and, therefore, the current account deficit could be reduced to an "acceptable" level.
Let me note some theoretical findings that are actually in conformity with empirical observations of the Turkish economy, at least for the last 30 years since the early 1980s. The first theoretical finding is that there is no one-to-one relationship between the interest rates and the value of domestic currency, as the currency's value is determined by a complex process involving many other economic parameters in addition to interest rates. Second, interest rates cannot be reduced just by the central bank independent of inflation targets, public sector borrowing requirements, public debt burdens and the savings-investment gap. Thus, if there is a problem in the current account deficit on one side of the coin, there is another quite big and serious problem on other side, one that requires exhaustive efforts.
In this age of global interdependence and cutthroat competition, reliable and sustainable solutions to the structural problems of Turkey require fixing the problems first, followed by a good process of management. In other words, without good management, it is unlikely that there will be good results.
Yes, Turkey has a "big external deficit." But the first important point to understand is that in an open economy, most of the time external deficit stems from domestic imbalances. There is no free lunch in a world of limited resources and tradeoffs. Turkey's major domestic deficit is the ever-rising savings-investment gap. Maybe an insignificant part of the existing current account deficit could be reduced and explained on the basis of the economic policies of the government and the Central Bank of Turkey.
In order to solve the problem of the external deficit, Turkey must either reduce the rate of investment, which is quite inadequate when compared with other rising market economies, or increase national saving rates to close the savings-investment gap. Although the second alternative is the correct solution, due to Turkey's well-known structural deficiencies it is unlikely that the country could increase its extremely low level of national savings rapidly in the foreseeable future.
Despite these structural limitations on the supply-side parameters of the funds, it is quite obvious that Turkey cannot forego the investment race, because future financial success will come only through high-quality investment in the correct industries. If this diagnosis is accepted as correct, then to keep the investment rate at the possible highest rate, we must accept that the existing savings-investment gap can be closed by utilizing external sources of finance and that, of course, sharing our profits with the owners of production factors, until we can substitute them from the domestic market, is necessary.
In this regard, we must stress that in a country where there is high dependency on external factors in the process of production, it is unlikely that we can solve the current account deficit through the use of artificial economic policies like continuous devaluations. The recent history of Turkey is the clearest proof that policies directed toward keeping domestic currency at a low value will not improve the competitive strength of the economy in general.
Instead, what we need is to increase our national saving with continuous and hard reforms, such as social security reform, parallel to the recent implementations in the world, and to learn to invest in high value-added industries by transferring limited resources from declining industries to those with bright futures.
As can be seen, neither the interest rate nor the current account deficit can be automatically eliminated by orders from the central bank. The current account deficit and interest rates are the results of structural deficiencies, and their solutions require real tools and efforts.
