Question 19N.2.HL.TZ0.2b

Turkey’s rising current account deficit

1. According to forecasts from the International Monetary Fund (IMF), Turkey’s current account deficit is expected to rise from 4.4 % of gross domestic product (GDP) in 2016 to 5.6 % of GDP in 2017, with real GDP growth falling from 3.3 % in 2016 to 2.9 % in 2017. The current account deficit is perceived to be the biggest problem for Turkey’s economy. An international credit agency has reduced Turkey’s credit rating to “negative” because risks to the country’s credit profile have risen significantly in recent months.
   
   
2. Economic activity has been further damaged by several factors, including political uncertainty, conflicts in neighbouring countries and trade protection by its trading partners. Turkey’s tourism revenues, which contribute 10 % to the country’s GDP, have fallen significantly due to security concerns related to terrorist attacks.
   
   
3. The current account deficit has contributed to a massive depreciation of the Turkish lira (Turkey’s currency), which dropped by 20 % against the United States dollar (US$) over the previous year. This is a significant problem for Turkey, which relies on a steady inflow of overseas investment to finance its current account deficit.
   
   
4. Part of the problem is Turkey’s dependence on imports, especially energy. Higher import costs for energy will further worsen Turkey’s current account deficit and create further pressure on inflation (Figure 4).
   
   
5. The Turkish government has blamed the currency collapse on speculators. The president of Turkey has asked Turkish citizens to help. There is approximately US$140 billion worth of foreign currency being held in foreign currency savings accounts in Turkey. The president wants Turkish people to use their foreign currency saving to support the Turkish lira. However, Turkish citizens seem to have ignored his wishes, and bought US$1 billion worth of foreign currency in September 2018.
   
   
6. Analysts believe that the only solution to the falling value of the Turkish lira and the current account deficit is an increase in the official interest rate by the central bank. However, Turkey’s president has made it clear that he will not accept higher interest rates. In fact, he has demanded lower interest rates to stimulate the economy.

[Source: adapted from ‘Battered: Turkish lira suffers worst year since 2008’, by Mehreen Khan, Markets, FT.COM,
22 December 2016, ‘Turks urged to trust in lira to defeat “tyranny of dollar”’, by Mehul Srivastava and Jonathan Wheatley,
Markets, FT.COM, 07 December 2016 ,’Turkish lira tumbles amid fears on economy and terrorist threat’, by Mehul Srivastava
and Roger Blitz, Markets, FT.COM, 12 January 2017, used under licence from the Financial Times. All Rights Reserved;
Turkey’s Surging Current Account Deficit and Its Impact in 2017, by Market Realist, Apr. 21, 2017:
http://marketrealist.com/2017/04/turkeys-surging-current-account-deficit-and-its-impact-in-2017/, 21 April 2017;
Turkey’s annual current account deficit growth jumps to 68 percent in May, www.intellignews.com, 13 July 2017.]

Figure 4: Turkey inflation rate

[Source: adapted from https://tradingeconomics.com, accessed 6 September 2017]