Question

Turkish economy has struggled with current account deficits since the 2000s. However, although current account balance had a deficit, an adjustment in current account balance was observed in years 2002, 2009 and 2018. Discuss what type of automatic mechanisms and adjustment policies might have contributed to this adjustment. Explain clearly by being specific about the type of the mechanism and policy for each year.

Answer 1

Answer :-

The current account balance of in the year of 2002,2009 and 2018 were adjusted in the following manners. Each year current account balance is discussed below,

(1).Current account balance in 2002:-

Foreign Direct Investments in Turkey were in a large amount which increased the forex reserves. Thus, there was Financial account surplus.

This automatic adjustment in the Balance of payment, with deficit in current account and surplus in financial account balanced out.

(2).In 2009 :-

Turkish government adopted structural reforms in 2009 and there mergers and privatization was there along with higher FDI. Forex reserves were high which led to debt financing of current account deficit.

(3).In 2018 :-

In 2018, there was a currency crisis, and there was depreciation, which increases the cost of imports which in turn causes the exports to be more attractive. These adjustments contributed to the adjustment in current account deficit.