A portrait of Turkish President Recep Tayyip Erdogan hangs in a currency exchange office in Istanbul, Monday, December 20, 2021. FRANCISCO SECO / AP
Raising finance to revive its ailing economy is a major challenge for Turkish President Recep Tayyip Erdogan, who is not going into the crucial deadline of June 2023 elections (presidential and parliamentary) as a favorite.
Since Russia invaded Ukraine on February 24, deficits have only widened. In question is the global increase in prices for raw materials and energy (gas and oil), which Turkey, the most industrialized country in the region, imports massively, especially from Russia.
President Erdogan, who has been regularly re-elected for twenty years on the back of his promises of economic prosperity, now has several thorns on his feet. These include the current account deficit (balance of trade and financial exchanges with foreign countries), the chronic trade deficit, consumer price inflation (85.5% in October) driven by a skyrocketing energy bill and by the ongoing devaluation of the local currency, the Turkish Lira (LT).
“Errors and Omissions”
The lack of foreign exchange and the financing of the current account deficit are recurring problems for the Turkish economy, which depends on foreign capital for its development. However, the country can no longer rely on them as foreign direct investment has fallen to its lowest level of $5.7 billion in 2020, up from $19 billion in 2007, according to Bank Central Turkey (BCT). have fallen.
To fill in the gaps, the government found a trick revealed when reading the balance sheets released by the BCT in mid-September. Under the heading ‘Net errors and omissions’, capital inflows of unknown origin, but of quite significant magnitude, are recorded.
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Thus, $5.5 billion was recorded in July, bringing the total of these mysterious capital inflows to $24.4 billion for the first seven months of the year. Enough to offset part of the current account deficit, which is estimated at $36.7 billion in the first nine months of 2022.
Excellent numbers
Some of these mysterious capital inflows can be explained by the perfectly legal repatriation of currencies held abroad by the private sector. Turkish exporters are repatriating their earnings to Turkey and are forced to comply with measures recently introduced by the government, forcing them to convert 40% of their FX earnings into TL.
The heading under which these funds are listed implies that their origin will be indicated later when the transfers have been confirmed. Current account data are calculated according to long-term spending patterns, which can be revised later. “Net errors and omissions” should be an exception and show only minor numbers. In the case of Turkey, the numbers are exceptional.
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