Turkey’s Central Bank’s “unorthodox policy” of hiking up reserve requirement rates has given way to a widening of the current account deficit rather than reduced the gap, the newly appointed Economy Minister Zafer Çağlayan told journalists in a meeting in Istanbul on Tuesday.

“When such measures are taken, one should think of their side effects as well,” Çağlayan said at a meeting with representatives of the Economy Journalists Association, or EGD.

Energy demand is increasing day by day, but private firms willing to provide energy production or distribution services are unable to find financing, due to the increase in reserve requirement rates, the minister said. Each $10-per-barrel increase in oil prices causes a negative effect of $4 billion in the country’s current account balance, he added.

“As the Central Bank hiked reserve requirements, domestic demand has been drawn forth, which [encouraged consumption and thus] increased imports,” Çağlayan said. The minister also said they would solve the current account deficit issue, and that they had already identified the reasons for the large gap.

Turkey’s current account deficit continued to widen in May, to a level of $7.75 billion, according to Central Bank data revealed Monday. The deficit, mostly caused by the country’s large trade gap, is the second biggest gap since records began in 1984, after the record 9.8 billion in March this year.

Minister Çağlayan said they expected the current account deficit would stabilize over the summer and start coming down in autumn.

Turkey will produce as many of the goods it is importing as it is capable of, Çağlayan said. The minister, however, recalled that they were unable to keep under control prices of goods like iron, steel, oil, aluminum, copper and cotton, which together make up a third of imports. Prices of such goods have increased 100 percent, the minister said.

“[Turkey’s] import dependency resembles a drug addiction,” Çağlayan said.

“Turkey is the largest importer of iron-steel scrap,” he said, adding that some $9 billion worth of scrap was imported last year. “This counted for 20 percent of the current account deficit.”

The main factors for the current account deficit widening are the increase in domestic and foreign demand, the rise in prices, low foreign exchange rates and the continued vigor of consumer demand, Çağlayan said. He also said 128 countries in the world had problems with their current account deficit.

The deficit does not pose a risk for Turkey for the time being, according to Çağlayan. “There is no need to panic. There is no concern in financing the deficit.” He also said he would soon meet with the Central Bank and the Banking Regulation and Supervision Agency, or BRSA, to discuss these issues.

New incentives

The economy ministry has identified consumption trends in other countries, according to which the country’s exports strategy will be prepared, according to Çağlayan. He said they were preparing to introduce a new incentives system this year. “We will develop an incentive system that aims to decrease import dependence and to increase the economy’s real production.”

Çağlayan also said they expected an average growth rate of 7 percent by yearend.

The economy minister also touched upon comments by foreign media and rating agencies, such as The Economist, Moody’s and Financial Times, regarding the country’s current account deficit, about a week before the June 12th general elections. “These institutions’ aim is to disturb Turkey’s balances, to make it once more a borrowing country, and then suck its blood by hiking up interest rates.”