Closes the current account deficit ‘under the pillow’

Levent AKBAY Despite the aim of closing the current account deficit with the ‘new model’, which is stated to be implemented in the economy, it was revealed that the lifeline for the current account deficit, which could only be reduced to 36.5 billion dollars in the 9-month period of the year with the foreign currency of unknown origin, came from ‘under the pillow’ through informal transactions. The research of Gülbin Şahinbeyoğlu, Former Statistics General Manager of the Central Bank, Director of TEPAV Economy Monitoring Director, revealed that the excessive inflation reaching 80 billion dollars in the Balance of Payments ‘Net Errors and Omissions’ item, which is expected to approach zero over the years, was due to the unregistered transactions of domestic residents that could not be measured. According to the research of Gülbin Şahinbeyoğlu, who was the head of the team that prepared the ‘Balance of Payments statistics’ in her career at the Central Bank, after the exchange rate jump in December 2021, the foreign currency withdrawn from the markets came back and more ‘under the pillow’. According to the same research, it is not possible to monitor all foreign exchange movements that cause foreign exchange inflows or outflows in the Balance of Payments in Turkey. Although the factors affecting the Net Error Omission item have been monitored and analyzed since 1992, for example, deposits of non-banking residents in foreign banks can be compiled incompletely from the Bank for International Settlements (BIS) data (There are 48 countries reporting). In addition, Balance of Payments Statistics is published with a very short delay (about six weeks) compared to international practices, so data of a temporary nature are used instead of data not available at the time of publication. The summary of the findings of the study is as follows: It is expected that the scope, valuation and timing differences encountered during the compilation process of the Balance of Payments Statistics will be reflected in the statistics with data updates over time, and the Net Errors and Omissions (NO) item will decrease compared to its initial record value, and its cumulative amount will converge to zero over time. On the other hand, when the recent balance of payments movements are analyzed, it is seen that NHN had a historically high outflow monthly balance of 10.2 billion dollars in December 2021 and increased to 28.3 billion dollars in the following eight months to finance more than 70 percent of the current account deficit. It appears to have reached a substantial size. Another remarkable development is that the cumulative level of the NHN item could not reflect a capital inflow of 80 billion dollars. Historic peak of $80 billion When the cumulative level of NHN, which can be analyzed since 1992, is calculated starting from this date, it is seen that the NHN has been on an upward trend since 2011, the increases accelerated in 2022 and reached the historical peak value of 80 billion dollars as of August 2022. In Turkey’s Balance of Payments Statistics, the NHN item has been showing a high and continuous inflow balance in recent years, and a historical capital outflow in December 2021. It is known that in periods when financial markets are volatile and foreign exchange liquidity is limited, residents in the country reduce their foreign assets and meet their foreign exchange needs in the said period, however, recent data do not support such a move. Same level of entry and exit through banks The transfer of unregistered, in other words, under the pillow foreign currency assets to the financial system by domestic residents is also a transaction that creates NHV. In the balance of payments statistics, the relevant transaction banks will increase the deposit item, but since the transaction does not have a provision item, it will create an inflow NPL as much as the transaction amount. In addition, as a reverse transaction, the removal of foreign currency assets by residents from the financial system through transactions such as directly withdrawing them from banks will also lead to outflow NRW. When the NHN and the deposit item of banks are evaluated together, the parallel course of the two variables draws attention. While the changes in the deposit item of the NHN and banks support the discourse that residents withdraw their FX assets from the system at the end of 2021 and that expenditures are covered by these assets in the following months, they imply that inflows may be even higher. There was a serious foreign exchange inflow in 2022 NHN posted a historically high monthly outbound balance of $10.2 billion in December 2021, with a much larger total inbound in the months that followed. Therefore, at the end of 2021, it can be mentioned that there is an inflow of foreign currency assets beyond the ones that the residents removed from the system. Unable to track effective movements Limited publicly available data on effective transactions show that transactions have increased significantly throughout 2022. Although effective movements are an important reference for unregistered foreign exchange transactions, there is no detailed and comprehensive data set that we can follow the transactions in the market. The publicly available data sources on this subject, to the best of our knowledge, are the “currency and effective market transactions” of banks with the Central Bank, and the “effective cash holdings” of the Central Bank. Eyes on domestic residents… As a result, when the recent course of NPL, the changes in banks’ deposit items and the increasing effective transaction volumes are evaluated together, it is thought that the unregistered foreign exchange movements of domestic residents may play an important role as of the end of 2021, when the Turkish lira depreciated rapidly. Therefore, while the informal transactions of non-residents, which are discussed in the public and thought to originate primarily from Russia or immigrants, are worth examining, it is considered that the informality of foreign currency assets of domestic residents should be investigated first. According to Economist Mahfi Eğilmez, unregistered or out-of-system foreign currency and gold informality; It is defined as activities that are hidden from the public authority, are not recorded, and cannot be audited and verified because they are not recorded. Informal income is also the income obtained from engaging in such activities. There are two types of informality: Informality in the form of flow, informality in the form of stocks. Informality in the form of stream; it is usually out of the record of the production, earnings or expenditures made during the year. Such a situation is a development that affects GDP. In other words, if the production, earnings or expenditures made during the year are unrecorded, the GDP of that year appears as low as these unrecorded values. Let the total market value of all final goods and services produced in the country in a year be 100 units. Let’s say that 80 units of this production are registered and the remaining 20 units are unregistered. In this case, the GDP of this country appears as 80 units. Informality in the form of stock; It refers to the informal wealth stock that is formed as a result of the accumulation of unregistered revenues created in the past. Inventory has no direct impact on GDP, but if a portion of it turns into spending that year, that portion will affect GDP. The higher the informality as flow, the higher the informality as stock. In addition to informality, there are also assets that are kept out of the system. non-system entities; These are the assets resulting from the purchase and stocking of a product produced within the record. These are called ‘beings under the pillow’ in street language. For example, if gold or silver is produced and sold in various forms, but those who buy them tend to hide them under the pillow, these become values ​​that have been transformed from unregistered income into non-system assets. Source: Articles to Myself February 23, 2021 What is your net defect? Net Errors and Omissions item is an equivalence item that provides accounting equality in the balance of payments balance sheet. The other basic compilation principle of the Balance of Payments Statistics, which is based on the principle of settlement, is the “double entry accounting” system, and each transaction is kept with two equal records as “debit” and “receivable”. In case the double-sided entries are made simultaneously at the market value and in the period when the ownership change takes place, the sum of the “Current Account” and “Capital Account” is equal to the “Financial Account” item. Compiling Balance of Payments Statistics from many different sources, especially databases of banks, Turkish Statistical Institute and Central Bank, and applying questionnaires to individuals or institutions for some items such as tourism cause measurement, valuation and timing differences. Due to these differences, the theoretical equality on which the balance of payments is based cannot be achieved and the resulting differences constitute the residual NPL. All countries that compile and publish Balance of Payments Statistics contain NHN item in their statistics and this item is obtained by subtracting Current Account and Capital Account from Financial Account. According to the Central Bank, which transactions create Net Errors and Omissions? Receiving payments from bank records while obtaining customs records of goods movements related to foreign trade. Calculation of tourism income and expenses and luggage export data as a result of survey studies and the margin of error of the surveys. Registration of freight and insurance records according to the flag of the transport vehicles instead of the country of residence. Compilation of non-banking residents’ deposits in foreign banks from BIS data with incomplete coverage