Changes in energy prices affect the Turkish economy in two ways. First, it affects supply. Secondly, it affects the demand side. In terms of supply, increases in prices cause a negative impact on production costs. On the demand side, these are the uncertainties that occur and the negative effects that arise in terms of the income effect.
Current account deficit is the situation where a country's imports are higher than its exports. It means that the goods imported are more than the goods exported. In another words, it means that the economy consumes more consumption than its production. Meanwhile, the difference arises as borrowing. That means the economy actually spends money that is not there, and so it owes it. If this money is used in a positive and productive way, such as investments, the debt can be paid. However, if it is used as a source for public expenditures or in financing budget deficits, it would be difficult to pay the debt.
The major burden on the current account deficit in Turkish economy is the imports of intermediate goods and energy imports. In addition to this, the need for energy increases day by day and the fluctuations in the exchange rate affect the current account deficit as it is dependent on foreign sources.
Energy imports have a significant burden on the current account deficit of Turkish economy. The decrease in oil prices between 2015-2016 were one of the main reasons for the decline in the current account deficit in recent years. However, with the rise in oil prices and the increase in the USD exchange rate in 2017, there is an increase in the money paid to oil imports.
Changes in energy prices affects Turkish economy due to macroeconomic influences. Cost inflation is one of these effects. Cost inflation is a type of supply-induced inflation. The type of inflation resulting from the increases in prices as a result of increases in input or raw material prices for producers is called fiscal inflation. As a result of the increases in energy prices, these products will be used as inputs and will cause an increase in the prices of goods, which will cause cost inflation.
As mentioned earlier that energy resources are one of the leading inputs for production in Turkish economy. In other words, as a result of increases in energy prices, access to energy will become difficult and the economy will be adversely affected. As a result, growth will decrease. On the other hand, if consumers think that the effects of these events will be adverse in the short term, they will naturally tend to cut consumption or keep it constant. Of course, they will either try to reduce their savings or prefer to borrow to keep their consumption constant. With the borrowing event, the balance will create an upward increase in the real interest rate. As a result of the increase in input prices and the increase in real interest rates, real money demand will decrease and inflation will increase. Hence, all this will lead to a decline in GDP and an increase in real interest rates and inflation. The increase in inflation will also cause welfare loss for consumers.