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Turkey: Balance of Payments
Country Study > Chapter 3 > The Economy > Foreign Economic Relations > Balance of Payments

BALANCE OF PAYMENTS


Throughout the twentieth century, Turkey has suffered from a shortage of foreign exchange, a problem that has continued despite the improved export performance of the 1980s and the early 1990s. During the 1950-80 period, three balance of payments crises followed periods of rapid economic growth. After the crisis of the late 1950s, brought on by inflationary financial policies and excessive use of short-term commercial credits, Turkey received substantial aid from an OECD consortium, and the country's external debt had to be rescheduled. The foreign-exchange shortage of the 1960s was less the result of inflation than of increased demand for imports. The 1970 devaluation, along with increased workers' remittances during the early 1970s, sufficed to overcome the problem. Turkey's improved balance of payments status during the first half of the 1970s allowed the government to resort to foreign borrowing to finance rapid economic growth. However, the 1970 devaluation, government deficits, and the 1973 oil price increase worsened inflation. After 1976 Turkey tried several reform packages, none of which effectively addressed the underlying causes of the deficits. In 1979 Turkey's creditors had to reschedule some US$14 billion in debt in an arrangement that delayed repayments of principal for five years.

The policy package introduced after 1980 enabled growth to resume, largely by improving the balance of trade. Exports grew at an annual average rate of more than 20 percent from 1980 to 1985, much more rapidly than imports, reducing the trade deficit from more than US$4.6 billion in 1980 to an average of slightly less than US$3 billion a year from 1983 to 1985. Nevertheless, Turkey's merchandise trade balance remained in deficit because of continued high levels of imports.

In 1993-94, Turkey experienced its fourth major balance of payments crisis in the past forty years, despite a decade of reforms and structural adjustment. An expansionist fiscal and monetary policy had led to a sharp deterioration in the trade balance in 1993 as imports soared to US$29 billion, while exports lagged sharply behind at US$15.6 billion. A draconian adjustment program accompanied by an IMF standby agreement helped sharply reduce imports in 1994, but the trade deficit remained around US$4 billion and was projected at about the same level for 1995.

Economic reforms had strengthened the services account of the balance of payments in the 1980s, although this increase was insufficient to offset the periodic deterioration of the trade account in the 1990s. Meanwhile, remittances from Turkish workers abroad remained an important source of foreign exchange. Remittances averaged roughly US$2 billion annually from 1980 to 1985 but fell during that period from a peak of almost US$2.5 billion in 1981 to US$1.7 billion in 1985. In the late 1980s, they once again recovered, reaching a level of US$3 billion during the first half of the 1990s. The flow of remittances through legal channels is very sensitive to the real exchange rate and to foreign-exchange regulations.

Tourism was a relatively small source of services income until 1985 when earnings jumped to US$770 million, reaching around US$4 billion in 1994 as investments in this sector paid off. Interest payments on Turkey's foreign debt, which averaged about US$1.5 billion from 1980 to 1985, grew to US$3.2 billion in 1990 and were US$3.6 billion in 1994. They remained a major burden on the services account.

Turkey's deficit on the current account declined from US$3.4 billion in 1980 to about US$1 billion in 1985 as a result of the decline in the trade deficit and the increased surplus on the services account. Despite fluctuations mid-decade, by the end of the 1980s the current- account deficit was sharply reduced, although 1990 saw the deficit at US$2.6 billion as a result of high oil prices and loss of income stemming from the Persian Gulf War. Aid payments and certain policy measures led to a small surplus in 1991, but a lax fiscal and monetary policy by 1993 pushed the deficit to its highest level at US$6.4 billion. The policy measures enacted in coordination with the IMF helped the current account register a surplus of US$3 billion in 1994.

Turkey's capital account suffered from the heavy foreign-debt payments that came due in increasing amounts after 1985. Heavy borrowing in the late 1980s and early 1990s pushed principal payments up to US$4.4 billion in 1993, US$5.9 billion in 1994, and a projected US$7.7 billion in 1995. As a percent of exports of goods and services, Turkey's debt-service ratio rose to 33 percent in 1994, close to crisis levels.

Domestic savings were insufficient for the country's development plans, making continued foreign borrowing necessary. Direct foreign investment averaged only US$70 million from 1980 to 1985, as foreign investors hesitated to put money into the country. The growth of emerging market funds in the developed countries, combined with Turkey's economic- and financial-sector reforms, had led to a sharp increase in foreign direct and portfolio investment in the 1990s. In 1994 such investments were estimated at US$300 million. However, the country's 1994 balance of payments crisis was expected to dampen near-term enthusiasm for Turkish stocks and bonds.

Turkey's short-term debt increased in the mid- and late 1980s as the country scrambled to meet debt payments. In 1985 Turkey broke off negotiations with the IMF concerning a standby agreement and turned to commercial banks for short-term loans. In 1986 alone, Turkey's outstanding short-term debt increased by more than 40 percent to at least US$9.4 billion. As a result, short-term debt amounted to about 33 percent of total foreign debt, a development that sparked concerns abroad. By early 1987, it was reported that some foreign banks were limiting long-term loans to Turkey pending the outcome of the 1987 local elections. A similar situation transpired in 1993 in the run-up to the 1994 local elections. Short-term debt jumped from US$9.5 billion in 1990 to US$12.7 billion in 1992 and US$18.5 billion in 1993. The austerity measures enacted by the government and a surplus on the current account helped reduce the short-term debt to US$12.6 billion by the end of 1994, when long-term debt was US$52.8 billion. A little more than half of this amount was owed to private-sector creditors, which was a sign of the success of the economic reforms of the 1980s. Nonetheless, bilateral and multilateral creditors accounted for nearly US$18 billion. The relative shares of private and public creditors were expected to change during the mid-1990s as Turkey was obliged to borrow more from international agencies to stabilize its balance of payments.

Data as of January 1995




Last Updated: January 1995


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Turkey was first published in 1995. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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