- May 27, 2020
Balance of Payment in Turkey.
Balanceof Payment in Turkey.
Balanceof payment in Turkey.
Thebalance of payments (BoP), which is also called the balance ofinternational payments is the record of all the transactions whichtake place between the citizens of that particular country with theentire world for a certain period ( quarterly or mostly yearly). Thetransactions are carried out by firms, individual people orgovernmental bodies. BoP thus involves all the external transactionsboth visible and non-visible in a particular country (Bussiere,2013).
Accountsin Balance of Payment.
TheBoP has three different accounts through which various transactionsare grouped. These include the current account, the financialaccount and the capital account (Bussiere,2013).
Thecurrent account, goods, services current transfers and incomes areentered. This is the account which determines if a country hassurplus or deficit.
Goods- these are physical and movable in nature. It is recorded as atransaction if there is change of ownership to/from a citizen of aparticular country to a non-citizen.
Services-these occur from intangible activities such as tourism, businessservices, licensing or royalties. The money which is paid by someoneto get a service is taken as a debit or import while the moneyreceived is taken as credit or export (Bussiere,2013)..
Income– this is the money coming in which is taken as credit or the moneygoing out which is taken as debit of a particular country. Income,goods and services can offer an economy the required fuel toprogress.
Currenttransfers– these are the unilateral transfers in which nothing is taken inreturn. These include funds like donations, grants, remittances andaids. They are however not taken as actual sources which affect theeconomic production.
Thisaccount demonstrates the actual change in financial asset or physicalownership for a country. Together with the current account, they forma country’s balance of payment. This account includes portfolio,the foreign direct investment (FDI) and other variations in thereserve account (Bussiere,2013).
Thiscovers liabilities or the claims on non-citizens especially regardingthe financial assets. It involves portfolio investment, directinvestment and reserve assets. When entered in a country’s balanceof payment, the claims by non-citizens on financial assets owned bycitizens are taken as liabilities.
Importanceof balance of payment.
TheBoP offers a framework which can be used for various economies,ranging from the least developed nations to the most developed andsophisticated economies. Due to this, it is known that some elementsmay not be applicable in all cases.
TheBoP is a statistical statement which creates a summary of all thetransactions which take place between citizens and non-citizens for aparticular period of time.
TheBoP gives a detailed information regarding the demand and supply of acountry’s currency. For instance, if Turkey imports more goods andservices that it exports, then there is a likelihood that the supplyof its currency will exceed the demand in the foreign exchangemarket.
Usingthe double-entry system of accounting that goes with the BoP, everytransaction is entered as involving two entries and the total of thecredit entries and the total of the debit entries is equal.
Thevarious accounts which occur in BoP are differentiated by the natureof economic resources given and taken.
Turkey’scurrent, capital and financial accounts, and the overall balance.
Goods.Thestatistics on foreign trade are combined by the Turkstat. They areobtained from documents on basis of special trade (imports andexports) then they are changed to “general trade” means using anadjustment object which utilizes the data given separately by theTurkstat on free trade zones. To account for the goods which arebought by Turkey through shuttle traders to be resold abroad, someadjustments are made. So as to involve all the data on the provisionslike the airport procured catering by aircrafts and fuel imports, thesurvey is carried out by the CBRT on operators of the domesticairlines. Companies that offer domestic catering are surveyed so asto involve all the data on catering exports. Data on “Net exportsof goods under merchanting” that is got from bank reports is alsoincluded in the “Goods” section.
Services.While calculating the BoP, figures on GSM roaming fees andInternational transportation fees are included in the CurrentAccount. Tourism is a major player in the services part. Also,expenditures by visitors on international transporters using thecountry’s carriers are also included. The calculations concerningthe debit figures and freight credit rely on data obtained byTurkstat from the declarations of customs. The data on services suchas courier and postal services, insurance services apart from freightservices, news agency services, telecommunication services and legalservices is obtained from the companies that are related.
Thereare estimates which can be used for disposals or gross acquisitionsof nonfinancial assets which are non-produced. The approximations ofdebt forgiveness are not included when they are significant. Thesource of data which was used for acquiring the non-financial andnon-produced assets were the sports clubs in Turkey which showedrevenues that were obtained and costs which were incurred fromnon-citizen player transfers from the sports clubs.
Thedirect investment is covered both inwards and outwards. The data ondirect investment is collected using sample surveys. The surveys aredone annually. The liabilities and gross assets for equity arereported separately. The liabilities and gross assets for debt arealso reported separately. The 10% rule which applies on the directinvestments is used. There is a breakdown of direct investment intodebt and equity.
Theoverall balance is supposed to be zero if all the accounts arebalance well. However, this is not the case. The overall balance isfluctuating because data which is used is not completely captured.Some data is left behind during the gathering process and this hasmade the calculations to be incorrect.
Shiftsin the current accounts balances and financing accounts.
Thecurrent account deals with the payments that are related to thepresent economic activities like consumption, employment, output, useof capital and investment. It is taken as the total of the goods andservices involved in trade considering the payment factors in thatcountry such as rent, wage, dividend and interest, and the unilateraltransfers such as gifts, workers, ODA grants and remittances(Obstfeld& Rogoff, 2005).
Capitalaccount deals with the payments which are related to the movement ofbargaining power from the recent to the future without a directconnection with the present consumption and output. They are normallyreferred to as lending and borrowing or financial investments. Theyinclude the both the commercial and official loans.
Theshift between the current account and capital account shows thestability and growth of the economy. Increase in the current accountshows that the economy is more stable and that it is positivelydeveloping. Increase in current account shows that the rates ofemployment and consumption are increasing. It is also an indicationof increased levels of investment and output. All this show a goodgrowth in economy. Increase in the capital account indicates aproblem in the economy. If the capital account is increasing, it isan indication of a high borrowing rate. Increased borrowing is anindication of reduced production and negative economic growth(Goldstein& Khan, 2015).
Thegovernment use of its reserves to balance the BOP.
Theofficial reserve account is usually a branch of the capital account.It usually stores foreign currency and the government uses it to holdsecurities which are used by the central banks to regulate thepayments per year. The reserve account increases when there issurplus to be stored and decreases when there is deficiency sincemoney is withdrawn to control other sectors. It can also be used bythe central bank to control foreign trade market and control the rateof exchange to some point (Posner,2011).
InTurkey, the government used the reserve account to control theeconomy of the people and the currency of the country. The money inthe reserve account is stored inform of US dollars. This helps tomaintain the value of the Turkish lira. When there is surplus, thegovernment added some money to the reserve account but when therewere deficits, this money was used for foreign trade especially inimports. This has helped to stabilize the economy of the country(Berument& Taşçi, 2004).
Therelationship between the trade balance and the economic growth.
Recently,globalization has become a key factor in every country. No countrycan survive without imports since none of the countries produces allthe products which are used in that country. This has led tointernational trade being very important and almost compulsory in allthe countries.
Countrieswhich access free trade have a lot of benefits which they obtain fromthe openness of the trade. The openness of trade has positive impactson the economy of the countries involved. Trade can be expensive attimes for countries especially if there are fluctuations in prices orthe values of the currency involved. This is because a country maybuy products at a particular price and when the price increases orthe currency loses value, they incur extra costs. Fluctuations alsoaffect the market negatively when those importing are not sure of theprice they will get the products at.
However,when there is trade balance, the markets are always steady. When acountry is exporting more than it imports or the levels are almostthe same, there is always positive economic growth. This is becausethe country does not incur extra costs paying for imports. Theimports are catered for by the money obtained from the exports. Thismeans the country does not spent a lot of money buying products andthus the available funds can be used for other development functions(Sinn& Wollmershäuser, 2012).
Therelationship between the BOP and exchange rate movement of the localcurrency.
Forthe eight years observed, from 2008 to 2016, the US dollar has beenused to regulate the Turkish lira. The USD is used to control thebalance of payment in Turkey. The US dollar has been used as thestandard currency to regulate the imports and exports from Turkey.Using the reserve account, the government has been able to use the USdollar to maintain the value of the lira.
Duringbad economic times, the value of the lira goes down against the USdollar. However, the dollar controls the value of the lira to ensurethat it does not become completely low. During good economic times,the value of the lira raises against the US dollar. The dollar againensures that the value of the lira does not increase completely. Thedollar has therefore regulated the balance of payment ensuring thatthe prices of commodities remain almost constant and also the valueof the lira is stable.
Inflationrates data for the years selected.
Inthe selected period of eight years between 2008 and 2016, some casesof inflation have been witnessed. Although the economy is not stableand there are some fluctuations, the most notable periods ofinflation were in the third quarters of both 2014 and 2015. These arethe times when the rate of inflation is seen to be highest. The rateof inflation has also affected the balance of payment.
Lookingat the current account at that time, the balance of payment was alsoaffected. These are the times with the least trade activities withthe country importing less products and exporting very little inreturn. This is a clear indication that the inflation rates hadaffected the balance of payment.
Thecountry’s policy in regard to capital mobility.
Globalizationhas caused overdependence where some countries end up relying onothers for investments and funding. The portfolio investmentsoriginating from globalization has caused economies of countries tofall due to excessive money inflows. Some countries, with Turkeyincluded, took some measures to prevent this economic breakdown.
In1930, Turkey came up with a low to protect its local currency. Itintroduced a transition method to ensure currency exchanges and thefinancial markets did not waken the Turkish lira. This policy hasmade the lira to be stable and not to easily fluctuate its valueagainst other currencies such as the US dollar (Berument& Taşçi, 2004).
Berument,H., & Taşçi, H. (2004). Monetary policy rules in practice:Evidence from Turkey. InternationalJournal of Finance & Economics, 9(1),33-38.
Bussiere,M. (2013). Balance of payment crises in emerging markets: how earlywere the ‘early’warning signals?. AppliedEconomics, 45(12),1601-1623.
Data| The World Bank. (n.d.). Retrieved November 22, 2016, from http://data.worldbank.org/indicator/PA.NUS.FCRF:
Goldstein,M., & Khan, M. S. (2015). Income and price effects in foreigntrade. Handbookof international economics, 2,1041-1105.
IMFDATA ACCESS TO MACROECONIMIC & FINANCE DATA. (2016, October 21). Retrieved November 22, 2016, fromhttp://data.imf.org/?sk=7A51304B-6426-40C0- 83DD-CA473CA1FD52&ss=1409773422141
Obstfeld,M., & Rogoff, K. S. (2005). Global current account imbalances andexchange rate adjustments. Brookingspapers on economic activity, 2005(1),67-146.
Posner,M. V. (2011). International trade and technical change. Oxfordeconomic papers, 13(3), 323-341.
Sinn,H. W., & Wollmershäuser, T. (2012). Target loans, currentaccount balances and capital flows: the ECB’s rescuefacility. InternationalTax and Public Finance, 19(4),468-508.