| Date | November 2019 | Marks available | 4 | Reference code | 19N.2.HL.TZ0.2 |
| Level | Higher level | Paper | Paper 2 | Time zone | Time zone 0 |
| Command term | Explain | Question number | 2 | Adapted from | N/A |
Question
Turkey’s rising current account deficit
- According to forecasts from the International Monetary Fund (IMF), Turkey’s current account deficit is expected to rise from 4.4 % of gross domestic product (GDP) in 2016 to 5.6 % of GDP in 2017, with real GDP growth falling from 3.3 % in 2016 to 2.9 % in 2017. The current account deficit is perceived to be the biggest problem for Turkey’s economy. An international credit agency has reduced Turkey’s credit rating to “negative” because risks to the country’s credit profile have risen significantly in recent months.
- Economic activity has been further damaged by several factors, including political uncertainty, conflicts in neighbouring countries and trade protection by its trading partners. Turkey’s tourism revenues, which contribute 10 % to the country’s GDP, have fallen significantly due to security concerns related to terrorist attacks.
- The current account deficit has contributed to a massive depreciation of the Turkish lira (Turkey’s currency), which dropped by 20 % against the United States dollar (US$) over the previous year. This is a significant problem for Turkey, which relies on a steady inflow of overseas investment to finance its current account deficit.
- Part of the problem is Turkey’s dependence on imports, especially energy. Higher import costs for energy will further worsen Turkey’s current account deficit and create further pressure on inflation (Figure 4).
- The Turkish government has blamed the currency collapse on speculators. The president of Turkey has asked Turkish citizens to help. There is approximately US$140 billion worth of foreign currency being held in foreign currency savings accounts in Turkey. The president wants Turkish people to use their foreign currency saving to support the Turkish lira. However, Turkish citizens seem to have ignored his wishes, and bought US$1 billion worth of foreign currency in September 2018.
- Analysts believe that the only solution to the falling value of the Turkish lira and the current account deficit is an increase in the official interest rate by the central bank. However, Turkey’s president has made it clear that he will not accept higher interest rates. In fact, he has demanded lower interest rates to stimulate the economy.
[Source: adapted from ‘Battered: Turkish lira suffers worst year since 2008’, by Mehreen Khan, Markets, FT.COM,
22 December 2016, ‘Turks urged to trust in lira to defeat “tyranny of dollar”’, by Mehul Srivastava and Jonathan Wheatley,
Markets, FT.COM, 07 December 2016 ,’Turkish lira tumbles amid fears on economy and terrorist threat’, by Mehul Srivastava
and Roger Blitz, Markets, FT.COM, 12 January 2017, used under licence from the Financial Times. All Rights Reserved;
Turkey’s Surging Current Account Deficit and Its Impact in 2017, by Market Realist, Apr. 21, 2017:
http://marketrealist.com/2017/04/turkeys-surging-current-account-deficit-and-its-impact-in-2017/, 21 April 2017;
Turkey’s annual current account deficit growth jumps to 68 percent in May, www.intellignews.com, 13 July 2017.]
Figure 4: Turkey inflation rate
[Source: adapted from https://tradingeconomics.com, accessed 6 September 2017]
State two functions of the International Monetary Fund (IMF) (paragraph [1]).
Define the term depreciation indicated in bold in the text (paragraph [3]).
Using an AD/AS diagram, explain how Turkey’s reliance on energy imports is putting “further pressure on inflation” (paragraph [4]).
Using an exchange rate diagram, explain what is likely to have happened to the Turkish lira when Turkish citizens “bought US$1 billion worth of foreign currency” (paragraph [5]).
Using information from the text/data and your knowledge of economics, discuss the implications of Turkey’s persistent current account deficit.
Markscheme
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For AD/AS, the vertical axis may be “price level” or any similar terms such as “average (general) price level”. For the horizontal axis, “real (national) output/income” or “real GDP”. Any relevant abbreviations are acceptable.
Candidates who incorrectly label diagrams can be awarded a maximum of [3].
For an exchange rate diagram, the vertical axis may be exchange rate, price of (Turkish) lira in US$, lira in US$, or US$ per TRY, or US$/TRY The horizontal axis may be quantity, Q, or quantity of (Turkish) lira.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Do not award beyond level 2 if the answer does not contain reference to the information provided.
Command term
“Discuss” requires candidates to offer a considered and balanced review that includes a range of arguments, factors, or hypotheses. Opinions or conclusions should be presented clearly and supported by appropriate evidence.
Responses may include:
- Definition of current account deficit.
Economic analysis may include:
- AD/AS theory.
- Exchange rate market.
- Elasticities.
To explore the impact on:
- Current account is expected to grow to 5.6 % of GDP and is seen to be Turkey’s biggest economic problem (paragraph [1]).
- Could become even worse if the current security and political problems continue and the tourism industry continues to suffer, affecting net exports negatively.
- Causing a depreciation of the lira (paragraph [3]), which could worsen cost-push inflationary pressures (Figure 1).
- The deficit has to be financed on the financial account of the balance of payments (paragraph [3]).
- If the current account deficit is financed through FDI, it means greater foreign ownership of Turkish assets, which may be a threat to sovereignty.
- Turkey is vulnerable to outflows of investment (paragraph [3]).
- Turkey may need to increase interest rates to attract foreign savings (paragraph [6]) but this may further damage the economy through a possible fall in AD.
- Turkey may need to borrow money to finance the current account deficit, leading to increased indebtedness.
- The current account deficit may have contributed to the worsening in the credit rating (paragraph [1]), which will make it more difficult for Turkey to attract investment, and make it more costly to borrow.
- Falling currency due to current account deficit will make it more expensive to repay debts.
Any reasonable discussion.
