Falling into deficit: Turkey’s chronic and serious problem

 Although the Turkish economy is showing many signs that it has left the 2009 economic crisis in the dust, it will not be a carefree period for Turkey, as it falls into the same problems that it has always had with its balance of payments. In the span of the first two months of the year, the current account deficit grew by nearly 600 percent compared to the same period last year. In February alone, the deficit grew by 744 percent to reach $2.6 billion.

    The current account deficit, a measure of the nature of foreign trade in a country, was predominantly due to a serious trade imbalance in February as imports ramped up and the economy got going again. According to data from the central bank, Turkey had a foreign trade deficit of $2.21 billion, which made up more than 80 percent of the total current account deficit. The foreign trade deficit was a staggering $4.87 billion in the first two months of 2010, up from $36 million in the same period in 2009.

Moreover, the central bank attributed these high rises in the foreign trade deficit to a 26.2 percent rise in spending on imports, which reached $23.16 billion for the first two months of the year -- a figure that exports could not hope to make up for.

According to experts, these figures are a chronic reminder of Turkey’s skewed economic structure and the lack of maturity of its industry. In addition to this, crude oil prices had a significant effect on the current account deficit, since a barrel of crude oil has nearly doubled in price since the beginning of 2009, thereby increasing the cost of imports. The import of intermediate goods for production and Turkey’s inability to have a domestic industry that can source most, if not all, inputs domestically is further fueling this chronic problem.

Competition needed

Seyfettin Gürsel of Bahçeşehir University, speaking to Sunday’s Zaman, stressed that Turkey has always seen a serious rise in imports when the economy starts to recover from crises and slumps and that this time the cost of these imports, despite the fact that exports increased by 34 percent in March, was not balanced by Turkey sending its goods abroad.

According Gürsel, the only solution to such a current account deficit, which can suck up a country’s foreign exchange reserves and generally create imbalances that can lead to instability in the economy, is for Turkey’s economy to become more competitive in the global field. “We can start from the exchange rate and go on to myriad other issues to solve this,” Gürsel added. According to Gürsel, however, if the inflow of financial capital -- or “hot money” -- can cover this imbalance in the balance of payments, then Turkey can sustain this deficit for a long period of time. But just as liquid money can come into Turkey at any time, “it can also leave at anytime.”

Retired scholar Sudi Apak, speaking to Sunday’s Zaman, stated that Turkey’s chronic problem with its current account deficit was rooted in the fact that Turkey imports intermediate goods for production, so any recovery in its economy automatically means a serious increase in imports. Apak noted that even when putting aside natural resource imports, Turkey’s addiction to foreign intermediate goods for its production meant that it couldn’t bring its deficit down to a manageable level unless it was exporting high-value added goods.

Apak noted that if high-tech sectors were subsidized and exports from these sectors were supported, then Turkey would be in a much different position where it could sell high-priced goods that would bring foreign exchange to Turkey while also developing a native high-tech industry.

Austerity before growth

İbrahim Öztürk, a professor of economics at Marmara University, said these chronic current account deficits revealed a serious problem in the Turkish economy, especially during the current recovery period. He added that even before Turkey could totally shake off the effects of the global financial crisis, the current account deficit soared due to a large influx of imports that may lead to policies that would hinder growth when it is needed most. “It hasn’t even been a year yet, and we’ve already hit double-digit inflation,” Öztürk stated. Pointing out that Turkey falling into deficit is a chronic problem, he noted that these developments have historically resulted in a restrictive monetary and fiscal policy by the government. These austerity policies may therefore stamp out any kind of recovery and limit the growth of the Turkish economy.

Öztürk added that unless Turkey can reduce its reliance on intermediary goods from foreign sources and start producing them itself, it will always be limited by its own policies. “How does Turkey control its current account deficit? By applying restrictive economic policies to slow down the economy. This will not help us overcome our economic difficulties.”

He added that with these large current account deficits, the government pushes and pulls to implement policies that will balance its economy and prevent it from overheating, which in the end limits its growth. Öztürk stressed that the lack of a domestic intermediary goods industry meant that Turkey was doomed to live through these imbalances and the government’s handbrakes that limit growth.

Öztürk noted that although the government has put forward a stimulus plan for industry to try to overcome these problems and develop a mature production system, “none of these will work unless the government focuses their efforts more specifically.” He called on the government to implement projects that take advantage of their stimulus plans for industrialists, but focus more on specific problems in Turkey’s production backbone. İstanbul Sunday’s Zaman