Effective Use of Foreign Debt, the Case for Turkey

Abstract

An advanced financial system is regarded as a hallmark of development. Lending or borrowing money, or debt, plays a vital role in an economy. But just like any other economic decision, borrowing requires a thorough analysis of contingencies. Debt may lead to prosperity through sound investment, or it may overwhelm firms/people when not used properly. In today’s circumstances, borrowing from world financial markets is easier than ever before. In this paper, the possibility of foreign borrowing helping Turkey to improve its macroeconomic variables of GDP, consumption, government spending, investment, exports and current account balance is explored. We look for cointegration relationships between various foreign debt variables classified as public or private foreign debt; short-term or long-term foreign debt, and various macroeconomic variables. Later, the variables studied are tested to see if there are any statistically causal relationships between them. The following results are found: short-term foreign debt is not cointegrated with any of the macroeconomic variables when long-term foreign debt is cointegrated with some of them; private foreign debt is more effective than public foreign debt on macroeconomic variables. Whilst Turkey is critically dependent on foreign borrowing in financing its current account deficit, its current account balance is not cointegrated with any of the foreign debt data. Public foreign debt precedes government spending where private foreign debt follows private sector spending. This is interpreted as a sign that the private sector is more careful with its borrowing decisions than the government since its spending, which is procyclical with the business cycle, is leading its borrowing.