Slowing economic growth -- as well as increasing it -- has certain advantages and drawbacks. This is as true in Turkey as it is elsewhere in the world. The growth performance of the economy in 2007, targeted as 5 percent, will not match the 7.2 percent average growth performance of the last five years. It is also not satisfying -- particularly from the view point of employment and investment considerations.
Obviously with a growth rate below 7 percent, it is unlikely that Turkey can continue her recent attempts at convergence with the EU average nor compete with other emerging market economies of the same group that have been growing at a rate above 7 to 8 percent per annum throughout the last decade.
Nevertheless, the recent slowdown in growth performance has been a necessary step rather than a voluntary choice. This is due primarily to two factors: the inflationary inertia that has become more visible since 2006 and the ever-rising current account deficit which reached almost 8 percent of GDP in 2006.
In my view, it is unlikely that there will be a sustained recovery from these two significant weaknesses unless the potential growth zone of Turkey is pushed beyond current production possibilities. This can only be accomplished through implementation of second-generation structural reforms aimed at increasing national savings and overall productivity and reducing the cost-profile of the business sector that stems from the public sector and from excesses of bureaucratic inefficiencies.
That is why the current significant slowdown in the economy will not bring about a significant decline in inflation or the current account deficit. On the positive side, however, we can say that despite dramatic decline in foreign currency in Turkey, export performance has not been declining and there has been continued high growth performance throughout the year.
During the period between January and September exports, imports and the foreign trade deficit increased by 24.1 percent, 18.6 percent and 10.4 percent respectively. In this period, the import-coverage ratio was 62.7 percent, which is significantly above the last year coverage ratio of 58 percent. However, to fully understand the nature of the situation, we must also consider the composition of imports.
As can be seen in the figures, while the momentum of the imports of capital and intermediate goods has been lost, that of consumption goods is significantly rising. This trend is expected to continue in the near future. As this process is triggered by declining currency and short-term consumption-oriented credits from the banks, some precautions must be taken to prevent inflationary pressures as well as to stabilize the current account deficit.
