A grave dilemma in bal­ance of pay­ments

Dünya Executive - - COMMENTARY - İs­met OZKUL Colum­nist

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.

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