The Turkish industry is still highly dependent on imported materials, which means the country's current account deficit problem persists despite the record increase in exports.

The surge in exports was a major driver of the Turkish economy's growth rate of 21.7% in the second quarter, but the extent to which Turkey can maintain this trend is open to question, as its producers still rely heavily on imported inputs, and seem to have benefited from an unlikely advantage of the "Covid" epidemic. -19".

The massive growth rate announced earlier this month was largely due to the strong base effect of the second quarter of 2020, when the economy contracted by more than 10%, but there was also a clear growth momentum, marked by increased exports.

While the recovery of domestic demand contributed about 14%, exports contributed about 11%.

another engine

New investment has emerged as another driver, fueled by the depletion of stocks during the Corona epidemic.

However, the revival of the industry also produced some headwinds, namely the increase in the need for imported materials, thus imports also increased and the contribution of net exports to the growth was about 7%.

Preliminary indicators showed the continued positive impact of exports on growth and the balance of payments in the third quarter.

According to data from the Ministry of Commerce, exports rose by 37% to more than 140 billion dollars in the first eight months of the year, while imports increased by 26% to about 170 billion dollars, which means a deficit in foreign trade of nearly 30 billion dollars.

The value of exports on an annual basis amounted to 208.4 billion dollars, and imports 255.2 billion dollars, which leads to a deficit of about 47 billion dollars.

These figures represent a record level in exports and the highest level in imports since 2013.

Exporters acknowledge that the sharp increase in shipping costs amid the coronavirus pandemic has pushed European and even American buyers from being drawn to Asian sellers in closer locations, including Turkey.

Turkish producers rely on imported inputs and equipment to meet the increasing demand of domestic and foreign buyers (Getty Images)

Shipping costs

The Istanbul Garment Exporters Association, which represents an industrial key to Turkish exports, says in a recent report that shipping rates from Turkey have also increased, but Turkey has gained a certain advantage in exports to Europe and its main market, as well as the United States, where the increase in shipping costs to The Far East and China are much higher.

In an apparent attempt to maintain the shift, Turkish exporters resorted to dumping, according to official data on prices of non-domestic producers.

Likewise, the high level of unemployment in the country and the low cost of labor have played in the interest of exporters, as has the depreciation of the Turkish lira.

imported input

However, Turkish producers still depend on imported inputs and equipment to meet the increasing demand of both domestic and foreign buyers.

In a separate report, the Istanbul Garment Exporters Association highlighted the other side of the coin: “Although the increased cost of shipping from Asia to Europe has become a competitive advantage for Turkey’s ready-made garment sector in terms of exports to Europe, it has also increased the cost of providing this sector for raw materials from Far East Asia, causing supply chain problems,” says the report.

High freight costs come on top of Turkish producers' heavy dependence on imported inputs, which cost up to 50 percent of export earnings even in sectors such as apparel, food, textiles and leather, which are net export sectors.

current account deficit

In short, an increase in exports means an increase in imports for Turkey, and in the end, economic growth affects the country's current account deficit.

Even a record increase in exports has failed to solve Turkey's current account deficit, although it will help narrow the gap in the second half of the year, as many observers expect.

The government expects a current account deficit of $21 billion by the end of the year.

The ruling Justice and Development Party (AKP) has for years been promoting construction as the driving force for economic growth, even though the sector is inherently focused on the domestic market and is a spender rather than a source of foreign exchange.

With the turmoil in the construction sector now, the government appears to have rediscovered the importance of hard-currency lucrative industrial exports.

In its medium-term economic program published on September 5, the government expects total economic growth of 9% this year, with net exports contributing 3.4%.

However, in the following three years, a growth rate of 5% to 5.5% is expected, with a relatively lower net contribution to exports of 1% at most.

However, the program undertakes certain measures to promote exports in a sustainable way, such as efforts to improve and enhance transport and logistics corridors and policies aimed at enhancing quality, design and branding in predominantly low-tech production sectors, to enhance the added value of exports.

The program expects exports to reach $211 billion and imports to $258 million by the end of the year.

In other words, Turkey will face a foreign trade deficit of $47 billion despite higher exports.

Ankara needs to stimulate exports and focus on export-oriented, high value-added industrial production (Getty Images)

Unemployment and low wages

However, what other factors provide the impetus for exports?

The first of these factors is the labor force, which has become cheaper due to widespread unemployment and is used extensively in the production of low-tech goods in particular.

Official data show that despite the economic expansion in the second quarter, the share received by wage earners fell significantly from the same period last year.

The second lever is the continued depreciation of the Turkish lira. As of August, the dollar has appreciated by 17% year-on-year.

While the increase causes problems in the import sector, it brings benefits to exports, and thus exporters' desire to dump.

With the prices of goods sold abroad falling below their prices at home, some critics highlight the "dumping" effect of economic growth in Turkey.

Either way, Ankara needs to stimulate exports and focus on export-oriented, high value-added industrial production, to avoid serious current account deficit crises in the future.

This requires a regular and consistent incentive policy that will give confidence to the producers.

It is true that Turkey was late in doing so, but this is the way out.