As Turkey covers most of its needs with imported energy and is therefore exposed – like a large part of the planet – to the energy crisis, the unpredictable energy prices and the jump in commodity prices after the Russian invasion in Ukraine have exacerbated one of the inherent pathologies of the Turkish economy: its large deficits and consequent dependence on foreign capital to cover them. The latest figures put Turkey’s current account deficit at $32.4 billion in the first half of the year.
The large increase in the current account deficit was, after all, the reason why last month Moody’s downgraded Turkey’s debt to the “junk bond” category, and two other international houses standard & poor’s and fitch are expected to do the same.
However, as the Al Monitor website (https://www.al-monitor.com/) revealed during the week, only 8% of the deficit was covered by foreign capital inflows from direct portfolio investments, and 38% was covered by the Central Bank’s foreign exchange reserves. The remaining 54% of the deficit has been covered by so-called capital inflows of unknown origin. This is an accounting category that may concern to some extent legal foreign exchange flows of the private sector. However, as the website Al Monitor points out, it often includes illegal flows of money from criminal activities, the amount of which is difficult to ascertain.
The interest in the case of Turkey is that during the twenty-year “monarchy” of Tayyip Erdoğan, its deficits increase and with them the percentage of their coverage by capital inflows of unknown origin increases.
The role of inflows of unknown sources of capital in covering Turkey’s deficits was upgraded in 2018. It was the year that Erdogan succeeded in institutionally securing unlimited powers for the office of the president and reducing himself to a kind of monarch of Turkey. The result, of course, was to further discourage foreign investors, who were already worried because of the Turkish president’s unorthodox economic theories and his tactics of systematically interfering in the work of the central bank and in the formulation of monetary policy. Inflows of investment funds thus decreased, while inflows of funds of unknown origin reached a record of 22.7 billion dollars. Since then, capital inflows of unknown origin have been the main means of covering current account deficits, which have reached $98 billion.
