Is it possible to reduce the current account deficit with foreign exchange rates rising?
Deputy Prime Minister, Mehmet Şimşek, claimed that the depreciation of the lira has made Turkey more competitive. By “competitive” he means the advantage of our declining export prices and the resulting acceleration in exports. But the depreciation of the lira is not a new phenomenon. The lira has been depreciating since May 2013 when former U.S. Fed Governor Bernanke said the Fed was going to cut bond purchases. When considered as a currency basket, the depreciation of lira has reached 115 percent since then.
Don’t get the illusion that the decline in currency will automatically increase our competitiveness. To be able to have that advantage, inflation, especially wage inflation, should remain below the depreciation of the lira (in other words, wages should decline on a dollar basis). However, the cumulative inflation increase over the same period was just above 50 percent. Wage inflation is around the same level. The real effective foreign exchange rate, on the other hand, declined from 134 down to 84.
One should expect that our exports would rise significantly due to increasing competitiveness over the last five years thanks to the depreciation of the lira and, as import prices rise, our imports would relatively decline and hence our current account deficit should decline as well. But we don’t see such improvement when we look at the figures.
Some commentators claim that both our exports and export profits would rise with the rise in foreign exchange rates. But for that, for our exports to increase, foreign exchange prices of our export prices would decline too, and that means profits of our exporters should decline. In short, it’s not possible for our export volume and export profits to rise at the same time – it should be one or the other (however, more production will lead to a scale economy and that may increase the profits in exports moderately). On top of that, many of our export products’ price elasticity is quiet low – keep that in mind. The rise in Turkish exports is mainly driven by the accelerating demand from European Union economies. The influence of our price advantage (competitiveness) is very low in this regard. When we talk about the import perspective, import demand will naturally decline with rising foreign exchange rates. But the demand for energy and raw materials that can’t be produced in Turkey are only slightly influenced, or not influenced at all, by the rise in foreign exchange rates. We should also note that de- posit savings in Turkey increasingly gravitate towards foreign exchange. If we succumb to the view that currency will remain depressed and the lira should be weakened even more to raise competitiveness, we risk entering a bad spiral. And as a significant part of savings is in foreign exchange, the rise in the foreign exchange rate won’t necessarily reduce the demand for import materials.
Despite stating the lira became competitive due to its losses, Şimşek also underlines that any improvement in the current account deficit will only be possible with higher levels of savings in the Turkish economy. And he says that this is only possible if companies invest in R&D, increase their profits and make more investments with those profits. Additionally, public finance should remain strong and households have to save more.