Türkiye’s chronic current account deficit is one of the most challenging issues that the government’s new economic management team has to address to improve the country’s financial woes, experts said.
Türkiye’s current account deficit decreased to USD56.5bn from USD59.7bn. During the January-June period, the C/A deficit reached USD37.0bn, marking a considerable deterioration from the USD28.7bn in the same period of last year, meaning that the country spent much more on imports than it made in exports.
The current account deficit was 7.93 billion dollars in May 2023 compared with a 5.40 billion dollars deficit in April, the Turkish central bank announced.
The publication of the figures comes after the central bank substantially raised interest rates from 8 to 15 percent under the leadership of its governor Hafize Gaye Erkan and Finance and Treasury Minister Mehmet Simsek, both of whom were appointed after President Recep Tayyip Erdogan’s re-election in May.
This monetary tightening has been seen as a signal that the country was returning to a more orthodox monetary direction.
For over two years, Turkiye had adopted the unconventional method of lowering interest rates to fight rampant inflation that caused a cost-of-living crisis and the devaluation of the Turkish currency.
On August 1, 2021, one U.S. dollar was equal to 8.3 Turkish liras, while this week the greenback traded up to 27.00 liras.
High inflation figures and the lira’s declining value have tormented consumers in the last few years.
Türkiye’s annual inflation eased to 38.2 percent in June, down from 85 percent in October last year, but the purchasing power of consumers has not improved despite wage and pension hikes implemented by the government.
However, pre-election spending and cheap credit is overheating the economy, pulling inflation behind. According to the forecast of the Central Bank, CPI is penciled to rise to 58% by year-end. Private forecaster project 60-70%, while several key figures such as former chief of the stats agency Birol Aydemir claim the agency is lowballing inflation by as much as 10 percentage points.
Despite a buoyant tourism season, which ought to generate monthly current account surpluses in summer months, TL is under pressure, as soaring trade deficits, reaching $12.7 in July, suck up foreign currency from the country. Central Bank has so far accumulated only small sums of FX reserves for winter food and energy payments, as well as foreign debt redemptions, estimated at $160 bn per year.
Several press sources claim individuals are migrating to hard currency and may even be pulling their deposits out of the banking system, because of low confidence in economic policy and Central Bank’s ability to stop further currency depreciation.
The lira has lost more than 30 percent of its value against the dollar since the beginning of the year, making imports more expensive for Turkish consumers while simultaneously making exports of the country’s goods more attractive.
Meanwhile, the cumulative current account deficit for the last 12 months rose to 60 billion dollars, the highest since 2013.
“This indicates a high current account deficit situation above the sustainable level,” Enver Erkan, chief economist at Istanbul’s Dinamik Investment Securities, told Xinhua.
The expert said that Türkiye’s economy is still subject to inflationary pressures despite a drop in inflation figures as significant wage hikes are expected to fuel consumer prices.
“Inflation will record strong increases starting from July due to post-election costs, new hikes, wage inflation and rising exchange rates,” Erkan added.
“Overall, the (current account deficit) data once again confirm a growing need for a rebalancing in the economy,” ING Bank, a subsidiary of Dutch multinational banking and financial services corporation ING Group, said in a note to investors last week.
“Going forward, we will likely see an improvement in the current account as evidenced by the normalization in energy prices and continuing strength in tourism, while a recovery in global demand should also be supportive of the foreign trade balance,” the bank pointed out.
Hakan Kara, a former economist at Türkiye’s central bank, said that the new economic management team has to deal urgently with both the deficit and the inflation issues.
“For the stabilization programs to bring lasting success, it is necessary to solve the inflation and current account deficit at the same time. The way to this is through increased productivity,” he said on his Twitter account.
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