The un­sus­tain­able twin deficit state in econ­omy

Dünya Executive - - COMMENTARY - Tu­grul BELLI Colum­nist

It is a widely ex­pressed opin­ion that the state of a coun­try’s econ­omy ex­pressed as twin deficit, where there is a deficit in both the cur­rent account and bud­get, is not “sus­tain­able.” In­deed, Turkey’s cur­rent deficit was 3.6 per­cent of the na­tional in­come in the cri­sis year of 2000, while the ra­tio of public sec­tor bor­row­ing re­quire­ment (PSBR) was 8.7 per­cent of the na­tional in­come. Sub­se­quently, with the aus­ter­ity pro­grams of the IMF, PSBR re­mained be­low the av­er­age growth rate, which led to a de­crease in the ra­tio of public debt to na­tional in­come over the years. Be­tween 2005 and 2018, the ra­tio of PSBR was one per­cent on av­er­age.

In the same pe­riod, our cur­rent account deficit started to grow grad­u­ally. The pos­i­tive per­cep­tions of Turkey’s econ­omy in the 2002-2008 pe­riod, later on the ab­nor­mal in­crease in global liq­uid­ity, has pushed Turkey into per­ma­nent high cur­rent account deficit

ter­ri­tory. The av­er­age cur­rent account deficit for the en­tire pe­riod was five per­cent. Fol­low­ing the cri­sis trig­gered by the ex­change rate in­crease in Au­gust 2018, we ex­pe­ri­enced a rapid de­cline in the cur­rent account deficit. The 12-month cur­rent account deficit, which was $57 bil­lion in June 2018, has been reset as of June this year. If oil prices con­tinue to fall and tourism rev­enues con­tinue to rise, we may see a $5-10 bil­lion sur­plus in 2019 to­tal.

On the other hand, there has been an ab­nor­mally rapid in­crease in the bud­get deficit in the re­cent pe­riod. At the end of the first 7 months, the bud­get deficit in­creased by 53 per­cent com­pared to the same pe­riod last year, reach­ing TRY 69 bil­lion. More­over, this fig­ure does not re­flect the to­tal public sec­tor deficit. The deficit would be much higher if the in­creases in the duty losses of public eco­nomic en­ter­prises, other public in­sti­tu­tions and es­pe­cially public banks were in­cluded. On the rev­enue side, one-off rev­enues should not be taken into account when mak­ing fu­ture bud­get pro­jec­tions. For ex­am­ple, in the first 7 months of the pre­vi­ous year, while the Trea­sury port­fo­lio and par­tic­i­pa­tion rev­enues, which were one of th­ese rev­enues, amounted to TRY 14.5 bil­lion, they in­creased to TRY 62 bil­lion in the same pe­riod of this year!

The only rea­son for the ex­cess bud­get bal­ance in July was the trans­fer of TRY 22.3 bil­lion from the re­serve funds of the Cen­tral Bank, shown un­der the “Trea­sury port­fo­lio and par­tic­i­pa­tion rev­enues.” With the amend­ment made in July, all of the re­serve funds al­lo­cated from the Cen­tral Bank’s an­nual profit were trans­ferred to the Trea­sury ex­cept for the last year. This cor­re­sponds to a to­tal of TRY 40.8 bil­lion.

One of the key prob­lems of Turkey’s state bud­get is a low rate of di­rect taxes in to­tal tax rev­enue, such as in­come and cor­po­rate tax. This has in­evitably led to the bud­get be­ing fi­nanced by in­di­rect taxes such as VAT and SCT. A sig­nif­i­cant por­tion of th­ese du­ties are on im­ports and VAT. Thus, in­ter­est­ingly, bud­get rev­enues in­creased due to an in­crease in im­ports and a mas­sive deficit in bud­get was avoided while the cur­rent account deficit has soared. How­ever, in the cur­rent sit­u­a­tion, due to the on­go­ing re­ces­sion both in im­ports and do­mes­tic eco­nomic ac­tiv­i­ties, the real rev­enues of the trea­sury have de­creased con­sid­er­ably. The rate of in­crease in to­tal tax rev­enues in the first 7 months of 2019 was only 4.8 per­cent. Con­sid­er­ing that the av­er­age in­fla­tion rate in the first 7 months was 18.6, this means a very se­ri­ous real de­crease.

As a re­sult, we will see a se­ri­ous de­te­ri­o­ra­tion in bud­get fig­ures while the cur­rent account bal­ance will have a sur­plus this year. While the gov­ern­ment will try in­crease loans by low­er­ing pol­icy in­ter­est rates the in­crease in public sec­tor bor­row­ing re­quire­ment will put up­ward pres­sure on in­ter­est rates.

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