Turkey’s growing current account gap exacerbates lira weakness (Al Monitor, June 13,2022)

Turkey’s current account registered a $2.7 billion deficit in April and the gap reached $21.1 billion in the first four months of the year, according to central bank data released Monday, reflecting the growing side effects of President Recep Tayyip Erdogan’s focus on promoting growth despite runaway inflation. Turkey, many observers fear, might face a formidable tangle of risks by the end of the year should Ankara’s policy remain unchanged and continue to produce similar current account gaps in the coming months.

The widening deficit stems mainly from growing imports, including an energy bill that has swelled to up to $8 billion per month amid global price increases atop the severe depreciation of the Turkish lira. In April, Turkey’s exports were worth some $23 billion, in addition to a net revenue of $1.5 billion from tourism and other hard-currency service revenues, the total of which fell short of covering the $28 billion imports.

As in previous months, the imports were driven not only by the growth momentum but also stockpiling by economic actors mistrustful and apprehensive of Ankara’s economic policies. Wary of the government’s continued failure to stop the fall of the lira as well as rising global commodity prices, many enterprises have been reportedly stocking up on imported raw materials, semi-products, machinery and equipment to avoid even higher costs down the road.

According to Trade Ministry data, imports increased 41% from the previous month to reach nearly $30 billion in May, while exports stood at only $19 billion, resulting in a foreign trade deficit of some $11 billion last month. Judging by those leading indicators, the current account deficit is likely to have widened to about $30 billion in the first five months of the year.

Despite growing inflationary risks, Erdogan has pursued a growth-oriented economic policy since 2018 and pushed the fight against inflation to the backburner. Armed with sweeping powers since Turkey transitioned to an executive presidency system in 2018, he is now focused on the next presidential and parliamentary polls, due in June 2023 at the latest, and believes that a growing economy is the best way to maintain popular support.

Yet foreign direct and portfolio investments have declined in Turkey since 2018, depriving the country of crucial funds to finance its chronic current account gaps while the economy grows. The government’s obstinate promotion of growth has stoked imports and thus the demand for foreign exchange, adding to the weakness of the lira. The foreign exchange demand has been fueled also by short-term external debt liabilities as well as a flight from the lira at home to shield savings from the inflation storm.