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article imageTurkey reveals scale of deficit behind lira's plunge

By Dilay Gundogan (AFP)     Feb 13, 2014 in Business

Turkey ran up a huge deficit on its external accounts last year, official data showed on Thursday, highlighting a critical weak point for the damaged economy and devalued lira.

But the central bank, which revealed the figures, said the account balance should improve this year, as devaluation and tighter policy helped exports and crimped imports.

Hit recently by a currency crisis, the country's deficit -- a key weak spot -- showed an increase of $16.507 billion compared to the outcome at the same time last year, soaring to $65 billion (47 billion euros).

The figure was driven upwards by an increase in the foreign trade deficit and soaring imports, the bank said in its annual report.

But central bank chief Erdem Basci sounded confident that the deficit would shrink this year.

"There will be a considerable improvement in the current account deficit in 2014," he said, referring to a recent plunge in the value of the lira.

At London-based Capital Economist, analyst William Jackson, commented: "Turkey's current account deficit widened sharply at the end of last year, but the recent tightening of monetary policy means it could now start to narrow substantially."

He said: "In Turkey ... the recent tightening of monetary policy is likely to cause domestic demand to slow sharply, reining in the external shortfall."

In the afternoon trading on Thursday, the lira was changing hands at 2.2065 against the dollar, a slight fall from the value on Wednesday.

Deniz Cicek, an economist at Turkey's Finansbank, also forecast a reduction in external deficit.

"We expect the substantial currency depreciation after December to lead to a considerable reduction in the external deficit in the forthcoming months," he said.

He estimated that the current account deficit, which reached at almost 8.0 percent of gross domestic product in 2013, would fall to 6.0 percent of GDP at the end of 2014.

The balance of payments on current account is a critically important measure of all current payments into and out of a country, including payments for trade, expatriate earnings and investment income.

The ruling Justice and Development Party (AKP) has tried to reduce the current account deficit since it came to power in 2002.

Market turmoil

But analysts have warned for months that the deficit, measuring the gap between all current payments into and out of the country, is a pivotal weak point in the Turkish economy.

The country has been hit by market turmoil after a high-profile graft scandal implicating key government allies became public in mid-December, and after the US Federal Reserve began tapering its stimulus package, causing investment to flow out of many emerging markets.

The Turkish lira lost over 10 percent in two months before the Turkish Central Bank raised interest rates in late January, containing further pressure on the currency.

The government has insisted that its target for 4.0-percent growth of the economy this year remains intact although the analysts have revised their forecasts downwards.

The tensions also come as the country braces for a highly-charged election cycle this year starting with the local polls in March.

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