The Financing of Current Account in Turkey: ARDL Bound Test Approach

As per the balance of international payments, if a country has current deficit, it must be financed and the country must obtain foreign funds by means of borrowing or investment. Type and structure of incoming capital might influence decrease or increase of the current deficit in subsequent periods. The economy of Turkey integrated with international markets and entered into a rapid process of international expansion after liberalization of capital movements. Current deficit issue has existed during this process, except for the periods of recessions caused by capital outflow. The current deficit that has increased due to capital inflow with speculative characteristics caused breach in the external balance and deepened the crisis in economy during the periods other than years of crisis. The aim of this study is to measure the effect of finance calculations on current deficit in order to devise a solution for the current deficit problem in Turkey that has become chronic after the foreign expansion process. Using ARDL (Autoregressive Distributed Lag) analysis with quarter data set of the period between 1992 and 2003 in the economy of Turkey, effect of balances financing the deficit was estimated for short and long terms. The data on current deficit, portfolio investments and direct investments used in the study was obtained from Central Bank of Turkish Republic; while data on debt stock of private and public sectors was gathered from the information system of the Undersecretariat of Treasury. According to Zivot and Andrews that takes structural break into account and ADF, PP unit root test, series reaches stability at different levels. Cointegration relation among the series was also observed based on bounds test results. According to the longterm results, reduction of current deficit requires direct investments first, and then comes the portfolio investments. Coefficient of direct investment was found to be higher than portfolio coefficient, and this is an implication of need for direct investment for financing current deficient. Effect of public and private sector borrowings on financing current deficit was not clarified in long term. Direct investments and portfolio investments are also influential in the short-term reduction of current deficit. Furthermore, while private sector borrowings were found to have a positive impact on current deficit in short term, no impact of public borrowing was detected. That the value of the error correction coefficient with one period delay obtained from long-term turned out to be significant and negative in the short-term model depicts that the system shall be balanced back in case a deviation from long-term balance takes place.