A grave dilemma in balance of payments
One of the most fundamental problems of Turkey’s economy is its high current account deficit. Latest June and July data show that there is a surplus in the 12-month current account balance. In July, the surplus rose to a considerable level of $4.45 billion. This is the second highest level in our history after the surplus of $ 4.49 billion in January 2002.
As the current account balance yields such a considerable surplus, the expected development under normal circumstances is the automatic increase in the country’s foreign exchange reserves. Yet, despite the current account surplus, the melting in foreign exchange reserves continues.
Here is the major contradiction in the balance of payments: The economy achieves a current account surplus at a cost - paying the price with a serious contraction, declining investments, increasing unemployment, shrinking consumption and increasing impoverishment. Despite this, foreign exchange reserves are not increasing. Although the current account balance posted a surplus of $4.45 billion as of July, foreign exchange reserves shed another $1.08 billion.
Why the contradiction?
There are two reasons for this. The first is that foreigners, are having second thoughts about coming Turkey despite high interest rates and all the advantages offered. For example, 12-month total foreign direct investment has seen a small increase of $473 million.
The main source of this increase, however, is the $1.35 billion increase in real estate purchases by foreigners. There is a $879 million decrease in investments aimed at production. Moreover, a substantial portion of this is the sale of companies in difficulties to foreigners in return for debt.
Nevertheless, foreign currency inflows were $25.25 billion, well above the $1.66 billion of last year. Although the unaccredited foreign exchange decreased by $10.28 billion compared to a year ago, it is at the level of $8.71 billion.
The sum of these two is almost $34 billion. When we add the current surplus of $4.45 billion, there is a positive contribution of $38.4 billion to foreign exchange reserves. Nevertheless, foreign exchange reserves decreased by $ 1.08 billion.
The second and more striking reason for the contradiction in the balance of payments is here: The outflow of domestic hot money and the contraction in foreign credits.
Since international banks do not trust the Turkish economy, it is more difficult and expensive for the real sector and banks to obtain external loans. On the other hand, banks and companies are trying to reduce their foreign debts as the currency risk continues. As a result of these two factors Turkey, which increased its foreign loans by $15.17 billion a year ago, had to make a net debt payment of $13.03 billion this year.
The cost of this outflow of domestic hot money abroad is higher than the contraction in foreign loans. The amount of domestic hot money that went abroad as a stock-bond investment and deposit increased by $19.46 billion, reaching 6.56 times the previous year to $22.92 billion.
The most important reason for these developments, which depleted the economy’s arsenal against external fragilities, is that confidence in economic policies and politics has been lost both outside and inside.