In the light of the Libya incident we must expect that not only will the current account deficit grow, but also that it will become more difficult to finance.

"I believe that we are riding faster than the car and the road conditions allow." I wrote this last Tuesday to illustrate my understanding of the latest monitoring note of the IMF on Turkey. Since then, the dangerous trend of the current account deficit has become clearer. The challenge is even more serious with the recent developments in Libya. The movements in the Arab streets seem to have the potential to make the structural imbalances in Turkey's economy more evident. The concerns of the Gadafi's made-up state will strain Turkey in economic terms. Let us discuss what we can expect.

I have been learning since the Jasmine Revolution that there are two types of Arab countries: those with institutional infrastructure and rules, and Mickey Mouse countries without them.  The first rule of a smooth transition in a country is a state tradition. We keep on learning. Egypt and Tunisia are in the first group while Libya is a Mickey Mouse state. While the former two countries do not have petroleum reserves, thus they are of no interest to the world. Libya, however, has petroleum reserves and therefore is of interest to the entire world. The other day, the rector of the American University in Cairo said, "Libya is Somali with petroleum." Somali is the leader of the made-up countries contest; it is where the rules of the game were set.

So, why do the developments in Libya concern us? The reason is that they will affect Turkey's rapidly growing, uncontrolled current account deficit adversely. The process is expected to work via three channels. First, is the rise in oil prices, which have been increasing since last Saturday. The rate of increase has reached as high as 10 percent. Since it is certain that a smooth transition cannot take place in a made-up state, oil prices go up in tandem with the concerns about the future of reserves. As oil reserves instantly become as expensive as gold reserves, the acceleration in prices furthers. How will this affect Turkey?  To begin with, the import bill will grow. This, in turn, will increase the current account deficit.

Let us come to the potential effects of the recent developments in Libya on Turkey's exports. Turkey has been seeking to compensate for the losses in the laggard European markets in the Middle East and Northern Africa markets. Now, however, we must expect that the demand in all of Turkey's export markets will be affected negatively by the developments in Libya. The rise in oil prices most probably will have an impact on Europe's growth performance. In addition, the chaos in the region can be expected to reduce the risk appetite across the Northern African and Middle Eastern markets. Even if you manage to make exports, it will become more difficult to collect the revenues now. Given the absence of export insurance systems, these markets have become even riskier. Turkey was number two in the world in construction activities, but now we must expect to face problems in receiving payments from the region in question. It would be wise to analyze in detail the impact of the new social programs that Saudi Arabia has introduced to deceive the public on the payment capacity of the country. The lesson to be learned goes as follows: With the Libya incident, the capacity of Turkey's economy to generate foreign exchange revenues faces another challenge: the current account deficit will increase further.

Let us come to the third point: In the recent period international funds have demonstrated a trend of homecoming. Should the transition problems in the Arab streets continue, we must expect this trend to grow.

With this perspective, Turkey is the weakest link. Therefore, in the light of the Libya incident we must expect that not only will the current account deficit grow, but also that it will become more difficult to finance.

What happens then? The risk of inflation grows, the interest rate increases and growth slows down.

Look, this situation could even be good for us. Turkey's main challenge in 2011 was how to cool down the economy. That is what the IMF's assessment suggested. Even though it is an election year, that is where the opportunity lies.

This commentary was published in Radikal daily on 25.02.2011