In hope for forever current surplus days

EXPORTS were increasing and imports were decreasing earlier this year.

Thus, the foreign trade deficit was shrinking and Turkey even showed a trade surplus in October, according to the balance of payments. In addition, tourism income was positive. As a result, we thought that our current account deficit problem was over, or nearly over! But then what happened when we entered November? Tourism naturally slowed down, the competitive exchange rate disappointed us, and we had a deficit in foreign trade. As a result, we faced the current account deficit (again).

But still, it is clear that we are in a better situation as compared to 2020. First, there is less of a deficit, according to November data. We improved from USD 3.5bn in November 2020 to USD 2.7bn in November 2021. The deficit, which was USD 32bn in the first eleven months of 2020, was reduced to USD 11bn last year. The annual current account deficit, which was USD 35bn in November 2020, also decreased to USR 14bn last November.

It is clear that there is an improvement. But it is also necessary to go into a little bit of detail.

The improvement in the eleven-month current account deficit is USD 21bn (down from USD 32bn to USD 11bn). So, what is the source of this USD 21bn? Let’s have a look:

Approximately USD 11bn resulted from the shrinkage in the foreign trade deficit. While exports increased by USD 52bn, imports increased by only USD 41bn.

The contribution from tourism was USD 9bn, plus USD 11bn from foreign trade, USD 9bn from tourism, and an additional USD 1bn from other miscellaneous items.

Therefore, if things had not improved in tourism, we would not have seen the improvement in the current account balance. What does that mean? It means there wasn’t an improvement in foreign trade to the extent we thought there would be.

Will we see this improvement in the coming period? It is not easy to predict because it is difficult to know what export markets will look like. It is difficult to know the extent to which the impact of the pandemic will continue. In particular, it is difficult to predict energy prices.

Turkey exports cheap products, not those that are light in weight and heavy in value. The share of such products in Turkish exports is very small. Given this production structure, it is not possible for us to increase our exports at a high rate every year. And this structure is not likely to change soon.

Moreover, our industrial production is dependent on imports. So is energy. Therefore, we can reduce the current account deficit, sometimes we can even show a surplus, but this foreign trade structure prevents us from reaching a long-term account surplus.

We will either need to provide a very large foreign currency inflow from items other than foreign trade, especially tourism, or we should give up on account surplus for many years to come.