Mysterious capital inflows to the aid of the Turkish government


A portrait of Turkish President Recep Tayyip Erdogan hangs in a currency exchange office in Istanbul, Monday, December 20, 2021.

Finding funding to revive his struggling economy is a major challenge for the Turkish President, Recep Tayyip Erdogan, who does not approach the crucial deadline of the elections (presidential and legislative) scheduled for June 2023 as a favorite.

Since the Russian invasion of Ukraine on February 24, the deficits have only widened. In question, the global rise in the prices of raw materials and energy (gas and oil) that Turkey, the most industrialized country in the region, imports massively, especially from Russia.

Regularly re-elected for twenty years on his promises of economic prosperity, President Erdogan now has several thorns at his feet. Among them are the current account deficit (balance of trade and financial exchanges with foreign countries), the chronic trade deficit, consumer price inflation (85.5% in October), driven by an exploding energy bill and by the continued depreciation of the local currency, the Turkish Lira (LT).

“Errors and omissions”

The lack of foreign currency and the financing of the current account deficit are recurring problems for the Turkish economy, which depends on foreign capital to develop. However, the country can no longer count on them, foreign direct investment having fallen to its lowest level, 5.7 billion dollars (5.5 billion euros) in 2020 against 19 billion in 2007, according to the Bank. Central Turkey (BCT).

To fill the gaps, the government found a trick, revealed on reading the balance sheets published by the BCT in mid-September. Under the heading “net errors and omissions” are recorded capital inflows of unspecified origin but whose proportions are quite substantial.

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Thus, 5.5 billion dollars were recorded in July, which brings the amount of these mysterious capital inflows to 24.4 billion dollars for the first seven months of the year. Enough to fill part of the current account deficit, estimated at 36.7 billion dollars over the first nine months of 2022.

Outstanding figures

Part of these mysterious capital inflows can be explained by the completely legal repatriation of currencies held by the private sector abroad. Turkish exporters are repatriating their earnings to Turkey, forced to comply with the measures that the government has recently put in place, forcing them to convert 40% of their foreign exchange earnings into TL.

The heading under which these funds are listed implies that their origin will be specified later, when the transfers have been confirmed. Current account data is calculated according to long-term expenditure patterns that can be revised later. “Net errors and omissions” should be an exception, showing only minor numbers. In the case of Turkey, the figures are out of the ordinary.

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