Record Current Account Deficit and Central Bank Reserve

The Turkish economy broke records in two important data this week. I wish these data were positive for the Turkish economy. Yet, in a country like Turkey, which has both a current account deficit and a budget deficit, it is not welcome at all. The Turkish economy, which is already referred to as "fragile" in almost all economic analyses, is becoming more and more so thanks to the "Turkish economy model".

The Freedom Observer

The Freedom Observer

We monitor the ongoings of Turkiye in the fields of the rule of law, economics, civil society, and politics.

According to the data announced on March 12, the current account balance in January increased significantly compared to the same period of the previous year and reached 9 billion 849 million dollars, breaking a record monthly. In this way, the 12-month current account deficit rose to $51.7 billion. However, in January of last year, the current account deficit was 6 billion 889 million dollars. On the other hand, foreign trade data, which is the leading indicator for the current account deficit, shows that the foreign trade deficit will increase in February. This indicates that the annual current account deficit will increase even more. At this point, it should be emphasized that the criticisms made against the "Turkish economic model", which has been proved as a great failure, are justified. Because when this model was first announced, it was said that it would have a reducing effect on the foreign trade deficit, whereas the foreign trade deficit increased continuously.

When we look at the reasons behind the failure of the model, we can clearly see that these are not economic but political reasons. Because the government thinks that it will lose votes if the necessary conditions are met for the proposed model to be successful. Let's take a brief look at these conditions:

For the model to be successful, goods produced in Turkey must become cheaper for customers abroad. To this end, the Turkish Lira needs to lose value at least as much as inflation. Thus, it is hoped that exports will increase. However, the government is making great efforts to keep the USD/TRY exchange rate below 19 TL. This causes the Turkish Lira to become more valuable against other currencies due to the effect of inflation. Therefore, although exports increase, imports increase more than exports. In other words, the most fundamental pillar of the model is collapsing.

So why doesn't the government want the dollar to increase in value? The value of the dollar significantly affects the economic voting behavior of the electorate. The dollar price has been seen as a harbinger of inflation for many years in Turkey. Because Turkey has been a country with a foreign trade deficit for a very long time. Since the increase in the dollar will increase the price of goods coming from abroad (especially electronic equipment and vehicles, which have symbolic importance in terms of consumption), the worry of inflation causes a negative view of the government as there will be a decrease in consumption amounts.

Record Budget Deficit and Earthquake Tax

Just a few days after the record current account deficit, the budget figures for February were announced. Turkey broke another record: Central government budget deficit amounted to 170.6 billion TL monthly. Thus, the 12-month budget deficit rose to 441.6 billion TL. The most striking point was about the interest rates. Excluding interest expenses, the budget, which gave a surplus of 113.4 billion TL in the same period of last year, gave a deficit of 136.3 billion TL in this period. In other words, the central government spent approximately 250 billion TL more than in the same period last year.

As it is known, Turkey experienced a massively destructive earthquake. It would not be wrong to assume that some of these expenditures are the money spent due to the earthquake. But it is not possible to say that such a high expenditure was made to heal the wounds of the earthquake. As a matter of fact, when we look at the expenditure items, we see that most of the budget expenditures increase the current transfers and transfers to state economic enterprises.

It would not be wrong to say that this deficit will increase even more due to the earthquake. On the other hand, we have not yet fully seen the effect of expenditures that can be considered election investments such as the early retirement law (EYT), the increase in civil servant-retirement salary increases above inflation, which will increase the budget deficit. In the period ahead, we will see the effects of these investments more clearly on the budget deficit. According to the figures given by the Minister of Treasury and Finance, Nurettin Nebati, the cost of expenditures such as EYT, minimum wage subsidies, and electricity-natural gas subsidies to the budget will reach one trillion TL this year. On top of that, the expenses that have to be made due to the earthquake will be added.

In all this mess, the government removed some of the tax credits it provided to R&D companies This could be seen as yet another additional tax for these companies. Indeed, in such cases, imposing additional taxes is the primary choice of governments. It goes without a doubt that all citizens should take responsibility to heal the social wounds and eliminate the destruction caused by disasters. As a matter of fact, aid campaigns were also carried out in Turkey and a significant amount of money was collected to be transferred to the earthquake zone. But in an environment where the burden of the early retirement arrangement on the budget alone exceeds 250 billion TL, what is the meaning of the 100 billion TL income that will be provided by the additional tax brought! Unfortunately, Turkey prefers daily political benefits to long-term gains. The interests of the citizens and the government are diverging at an unprecedented pace. In addition, since the country has a fragile economy, the government goes through major rule changes in every disaster. For this reason, the country cannot attract international investments that it needs so much.

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The Freedom Observer

The Freedom Observer

We monitor the ongoings of Turkiye in the fields of the rule of law, economics, civil society, and politics.


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Freedom Observer #5

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22 Mar 2023


The Freedom Observer

We monitor the ongoings of Turkiye in the fields of the rule of law, economics, civil society, and politics.