The current account deficit (CAD) increased by 65 percent to $77.1 billion in 2011, but the monthly CAD reduction in comparison to the previous year's figures has continued, the central bank has said.

 The Central Bank of Turkey announced its balance of payments data on Monday. According to the statistics, the monthly CAD dropped by nearly 13 percent to $6.57 billion for December of last year, down from the $7.53 billion observed for the same month a year earlier.

 On a year-on-year basis, the decline in the CAD first started in November of last year, when it dropped by 13.2 percent to $5.2 billion compared to the same month in 2010.

 The reduction in December, which followed a similar fall in the previous month, came as a result of fiscal and monetary measures that have been taken to tackle the country's CAD, as well as a weaker national currency. The bank has adopted an unconventional policy mix of lower interest rates and higher required reserve ratios to make Turkey less attractive for highly volatile short-term international capital inflow while at the same time making it more difficult for consumers to take out loans from banks in Turkey in order to tame credit expansion throughout the year. These measures were coupled with government action late last year, when the executive branch substantially raised the private consumption tax (ÖTV) on certain -- mostly imported -- products such as cars and cell phones.

 While all this happened, the Turkish lira continued to weaken against major currencies. The US dollar was worth TL 1.83 at the beginning of December of last year but increased to as high as TL 1.89 before the month ended, granting Turkish goods a price advantage over foreign equivalents in international markets while making imported products much less attractive for consumers at home.

 Turkey has a CAD issue for two main reasons. One is that Turkey, an energy-poor country, requires more energy to keep the wheels turning as its economy continues to show impressive growth performance. Turkey's gross domestic product (GDP) grew by 9 percent in 2010 and by another 9.6 percent in the first three quarters of last year. The figures for the latest quarter of 2011 are yet to be announced but most indicators point to an economic growth of no less than 8 percent for the full year.

 Secondly, the country's industry is mostly dependent on foreign intermediate goods to produce final goods to be sold overseas so, in a nutshell, its exports grow only when its imports grow. Turkey's export revenues jumped nearly 20 percent to $135 billion in 2011, yet an even bigger surge in imports resulted in a wider foreign trade deficit, registering at $89.4 billion for the year. The trade deficit alone was enough to render the earnings from foreign direct investments (FDI) and tourism, as well as inbound profit transfers, useless in efforts to bring down the CAD.

Fading from the agenda?

 Speaking on a television program late last month, Turkish Central Bank Governor Erdem Başçı said the CAD would fall below 8 percent of Turkey's GDP and no longer be a topic of discussion in three to four months. Those remarks came on top of his earlier predictions that the gap will swiftly shrink as a result of fiscal and monetary measures as the country's economic growth slows to 4-5 percent this year.

 During the heated debates about the CAD and its impact on the Turkish economy that took place not too long ago, observers agreed that further widening of the gap has the possibility to create havoc and trigger an extensive financial crisis, something Turks will remember from the chaos of the early 2000s. That risk, however, appears to cause much less concern these days.

 News related to the annual spike in the CAD -- in contrast to the monthly decline -- found very little coverage in online media outlets. The attention was more focused on comments by Economy Minister Zafer Çağlayan, who said the total FDI the country received in 2011 was $15.7 billion, the fourth highest record of direct international capital entering the country's economy in recorded history and up from $9.1 billion in 2010. According to the United Nations Conference on Trade and Development (UNCTAD), the country attracted the highest amount of FDI between 2006 and 2008, with an annual average of more than $20 billion.

Source:  February  13, 2012 TODAY'S ZAMAN, İSTANBUL