Trade deficit slides 35% in Turkey

In a sign of potential economic slowdown, Turkey’s trade deficit decreased by 35 percent in June as both imports and exports declined. This shift comes as President Recep Tayyip Erdoğan has adopted more orthodox economic policies since his re-election.

Data from the Commerce Ministry on Monday revealed that Turkey’s trade imbalance shrank to $5.4 billion last month, with imports falling by 16.8 percent compared to the same period last year, totalling $26.3 billion. This marks the lowest import level since October 2021, according to official statistics.

The fall in import values in June can be attributed to the sharp depreciation of the Turkish lira, which has lost nearly a quarter of its value against the dollar since the late May election. As a result, the currency reached a new record low, declining 0.5 percent to TL26.07 against the dollar on Monday.

In June, exports also experienced a decline of 10.5 percent, amounting to $20.9 billion, possibly influenced by an extended religious holiday that may have reduced manufacturing activity. However, despite the recent improvement in the trade balance, the overall trade deficit widened by 19 percent in the first half of this year compared to the same period in 2022, according to the ministry’s report.

Liam Peach, the chief emerging market economist at Capital Economics, remarked that the Turkish economy had been showing signs of strength with robust domestic demand impacting import growth. The ongoing currency devaluation has contributed to the rapid decrease in imports, creating the current scenario.

Previously, President Erdoğan had aimed to bolster Turkey’s growth before a closely contested election by pressuring the central bank to keep interest rates in the single digits, despite soaring inflation at around 40 percent. However, after securing a five-year term following a runoff election in late May, Erdoğan has demonstrated a willingness to adopt more conventional economic policies by appointing two former investment bankers to head the Treasury and the Central Bank.

On June 23, the central bank responded to the economic challenges by raising interest rates by 650 basis points to 15 percent and easing interventions in foreign exchange markets to support the lira, which had previously suffered due to depleted foreign exchange reserves from past measures.

The weakened lira is expected to enhance Turkey’s export competitiveness, potentially leading to further narrowing of the trade deficit in the upcoming months. This, in turn, could help alleviate Turkey’s soaring current account deficit, which reached $54.2 billion or 5.9 percent of the gross domestic product in March, a significant vulnerability in the $800 billion economy.

However, the depreciation of the lira may present additional hardships for Turkish households, as it could drive up supermarket costs and reduce the value of bank deposits. Economists anticipate that inflation data for June, scheduled for release on Wednesday, will reflect these effects.

Despite the challenges, Peach believes Turkey can still avoid a recession if it gradually tightens its monetary policy and foreign investors return, reversing their departure due to Erdoğan’s unconventional policies.