The project-based incentives program, designed to promote investments in upper-medium and advanced technology, is intended to reduce the current account deficit in the medium to long term by granting incentive certificates to 23 projects and 19 large-scale firms. The product group to receive incentives covers high-tech imported inputs particularly important for Turkey's industrial production and exports, making the incentive program a significant step towards eliminating structural factors that cause the current account deficit.
Products covered by this program are divided into 12 groups.[1] Chart 1 shows net imports in each product group based on 2017 values. With Turkey running a foreign trade deficit in almost all of them, the net imports of these products stabilized at a certain level during 2013-2017, ups and downs notwithstanding. Accordingly, products that account for the largest share of net imports, i.e. the foreign trade deficit, are polymer and polypropylene, the most commonly used raw materials in chemicals and plastics industries. The net imports of these two products amounted to a total of 7.3 billion US dollars in 2017. Considering that Turkey recorded a current account deficit of 47.4 billion US dollars in 2017, these two products alone had a non-negligible negative impact on the current account deficit. On the other hand, the net imports of solar panels and accessories skyrocketed to 3.5 billion US dollars in 2017 from 42 million US dollars in 2013. This, however, comes as no surprise considering increased investments in renewable energy over recent years.
Total net imports of incentivized products increased by around 3 billion US dollars from 13.6 billion US dollars in 2013 to 17 billion US dollars in 2017. Likewise, their total share in net imports of intermediate goods excluding gold and energy was up about two points to 30 percent in 2017. Here, it is worth noting that products covered by the program account for a considerable share of the foreign trade deficit. For the last four years, net imports of these products have been representing roughly 40 percent of the current account deficit excluding gold and energy. Most of these products serve as key inputs for chemicals and plastics industries where industrial production and exports have been growing fast in recent years. This has the potential to inflate imported input bills in the following years. In addition, as renewable energy investments will remain on the rise, imports of solar panels can continue to widen the current account deficit in the upcoming period. Thus, the pressure on the current account balance will be significantly weakened when the projects covered by the incentive program materialize.
In sum, the project-based incentives program is intended for mostly imported high-tech intermediate products that are required in industrial production and have a considerable share in the current account deficit. The fixed investments in such products will be of large scale, and the projects thus have the potential to fuel the current account deficit in the short term, particularly through imports of investment goods. Moreover, providing selected large firms with these incentives is also key to the success of investments. Thus, although the project-based incentives program may have a negative impact on the cyclical component of the current account deficit in the short run through high fixed investment costs, it will make a particularly positive contribution to the structural component of the current account deficit in the medium and long term as the above products will be mostly produced in Turkey.
[1] Processed aluminum, carbon fibers, electrical batteries, heart valves, polyethylene terephthalate (PET), monoethylene glycol (MEG), zinc, railway vehicles and diesel engines, processed copper, polypropylene, solar panels and accessories, polymer.