Is the current account deficit still a serious problem?

Authorities have been happy because an increase in the foreign trade deficit has been slowing down. Some have thought that this might reduce the current account deficit during the same period. However, some foreign institutions still think that the CAD is one of the most serious economic problems for Turkey, and it is understood that finding a permanent solution to this problem is not easy. In other words, reducing the current account deficit requires a slowdown in the economy, as has been observed in recent months. This, however, is not a desirable solution.

There are many ways to put a brake on economic activities. In order to achieve that, it is necessary to reduce total demand. Monetary and fiscal policies offer a range of tools for this purpose. Any government can reduce the total demand by cutting public expenditures and/or raising taxes. Raising interest rates and banks’ reserve ratios are also effective at reducing total demand. The problem is that using these handy tools for that purpose is politically risky for all governments. The economic slowdown entails a slowdown in the growth rate of incomes, both national and individual. This might lead to governments losing popularity.

However, if the current account deficit continues to be a serious problem, Turkey’s credit rating may come under pressure, as happened recently, whether we like it or not. The size of the CAD is not the only problem. The reliance of financing the deficit mainly on short-term hot money inflows makes external equilibrium vulnerable. This is why not only foreign credit rating institutions but also some economists and businesspeople in Turkey are uneasy. As has occurred several times in the past, whenever some signs of a domestic or foreign economic and political turmoil appear, the owners of the short-term foreign investments want their money back at once.

This creates serious problems in foreign exchange and financial markets. Exchange rates jump to unbelievable levels and it becomes necessary to increase interest rates over those levels in order to stop the rapid outflow of foreign exchange. This turmoil then spreads to other sectors of the economy and creates widespread crises in a short time. The most recent example was the 2001 crisis in Turkey.

The core problem is the foreign trade deficit. Exporters try hard but imports exceed exports every month even though there has recently been a slowdown in parallel to the slowdown in overall economic activities. It is also impossible to reject the negative impact of foreign exchange rates on imports. However, the main reason is still the undesirable slowdown in growth.

If Turkey’s foreign trade figures are examined, it is easy to observe the real problem: Exports have never reached the level of imports. Almost everybody knows the reasons for this situation. First of all, there are some serious domestic problems which are very difficult to tackle. However, exporters also face some other difficulties in international markets. This is called dirty competition. Cheap labor, unrealistic input prices and some other advantages that are beyond the reach of Turkey make some emerging countries advantageous in export markets. In addition, this unfair competition increases the attraction of cheap imports from those countries. This was the main reason for the rapid increase in imports until recently in Turkey.

To be realistic, it is very difficult to solve all domestic problems in the near future, and it is also impossible to tackle “dirty competition” without international cooperation. Then what can Turkey do to tame the current account deficit? Not much for the time being. However, politicians can do more than imagined. It’s very simple to explain: Try hard not to create serious political turmoil that startles both Turks and foreigners.

There is another point which is as important as the one mentioned above. It is impossible, of course, to prevent all the negative impacts of political problems created by foreign politicians on domestic politics and economy. But it must be comprehended that it is also unnecessary to always get involved in some other countries’ problems. This might be as disastrous as domestically created political turmoil.