Turkey’s dark money flows soar

Turkey’s dark money flows soar
Istanbul's financial district.
By bne IntelliNews July 28, 2016

Corruption pervades all the countries of Emerging Europe, but how to measure it? One method, highlighted by Deutsche Bank in a report last year called “Dark matter: the hidden capital flows that drive G10 exchange rates”, looks at the amount of unregistered capital flows that are designated “net errors and omissions” (NEO) in balance of payments data. That line, which is there to account for rounding errors and small irregularities introduced by different methodologies and should only make a tiny difference to GDP, can actually run into billions of dollars, indicating huge hidden flows of capital. And Turkey’s NEO figures are spiking.

According to the data, the NEO line shows unidentified money inflows to Turkey reached $9.3bn in 2015, which equalled a relatively modest 1.16% of GDP. But this year Turkey is on course to produce a significantly higher NEO: in just May alone the NEO was $1.85bn, and within the first five months of the year, this number reached $2.6bn in total, while the entire current account deficit for the same five-month period was $14bn. If that keeps up for the rest of the year, then the NEO could turn out to be over 4% of GDP.

Heli Simola, senior economist at the Bank of Finland Institute for Economies in Transition (BOFIT), tells bne IntelliNews that apart from illicit capital flows the most common reasons for NEO have been timing problems, ie. an exported product and the timing of the money that will be received following this trade does not overlap in the short term, but in the long run this will be accounted for and so the NEO should eventually converge to zero.

“Nowadays, NEO is often related to challenges in recording complex international financial flows which are not necessarily illegal or grey, but just very difficult to follow and record properly,” Simola explains. She adds, however, that, “grey or illegal flows may also account for some of the NEO.” 

So having a persistently high NEO figure probably means something else is going on that is not being captured by the state and its bean counters. In countries like Russia the negative NEO figure is used as a proxy for illegal capital flight.

Prior to this year, Turkey’s highest ever NEO was a positive $9.4bn recorded in 2011, a general election year, which was equivalent to 1.2% of GDP. Perhaps not coincidentally, that year the Turkish parliament passed a wealth amnesty law in a bid to attract funds held overseas to help overcome the impacts of the global financial crisis. It helped draw in about TRY50bn ($16.9bn) of savings that were thought to be held in offshore accounts.

According to the World Bank, the cumulative NEO between 2005 and 2014 for Turkey reached a total of $23.7bn (see table).

Economists and politicians interviewed by bne IntelliNews stress that the lack of any investigation into the origins of this rise in NEO raises concerns about the political financing – ie. funding that is raised and spent for political purposes, especially during election campaigns – though it would be premature to speculate as to the exact causes or what is actually going on.

Faik Oztrak, deputy chairman of the main opposition party CHP, has asked several parliamentary questions about this matter to ministers responsible for economic affairs, but so far did not receive any satisfactory answer. In February Oztrak proposed the opening of a parliamentary inquiry into the issue, but that proposal has got nowhere and is unlikely to for as long as the fallout from July’s failed coup continue to roil the country

“For the whole period of the AKP government [2002 to today] the funds that come from unidentified resources amounts to $32bn,” Oztrak tells bne IntelliNews, using a higher figure than the World Bank total. “Where this money is coming from and why this inflow systematically happens needs to be scrutinized.”

Oztrak believes that illicit money flows to Turkey have accelerated since the beginning of the civil war in Syria. “Under this chaotic atmosphere, people in our region see Turkey as a safe haven and could bring their capital using unofficial channels,” he says.

However, Oztrak underlines the importance of starting a detailed investigation into the NEO problem in Turkey in order to head off accusations that Turkey has become a financial hub for terrorist groups like Islamic State and members of the Syrian regime.

Economic ramifications

There are also economic worries over these dark money flows. The chronic level of Turkey’s current account deficit, which reached $32.1bn in 2015, is increasingly being financed by the illicit flows suggested by the high NEO in recent years. “Financing the current account deficit through unidentified channels is unsustainable,” Oztrak warns. “Turkey immediately should start to strengthen pull factors by solidifying the anchors like EU relations, rule of law, fiscal discipline and micro reforms to boost competitiveness.”

Enver Erkan, an economist at Istanbul-based Reel Kapital Securities, posits that the pessimistic forecasts for the Turkish economy and exporters are also playing a role in raising the NEO figure, because exporters prefer to hold their revenues in foreign accounts instead of bringing them into the domestic banking system at the time of the transaction.

“When these revenues are transferred to domestic deposit accounts at a future date, then the links between the transaction and money are lost and the difference is described as NOE,” he notes, adding that such behaviour indicates worries over Turkey’s economic vulnerabilities, linked to a possible hike in interest rates by the US Federal Reserve. “NOE is also related to currency volatility and the depreciation of the Turkish lira. If the central bank or its governors publish an official statement for large NOE, then the confidence of foreign investors would be restored, but at the moment it is not very transparent,” Erkan says.

Ege Yazgan, professor of economics at Istanbul Bilgi University, draws attention to the cumulative NEO figures amounting to $31bn since the beginning of the global crisis in 2008.  “Some incomes earned abroad by Turkish citizens and firms are not immediately transferred and kept abroad until financing needs dictate their transfers,” he says.