Osman Şenkul
In the International Monetary Fund’s (IMF) analysis titled “Crosscutting Issues in Compiling Balance of Payments and International Investment Position Statistics”¹ analysis, in its assessment of the ‘net errors and omissions’ item, states: “If the net errors and omissions term fluctuates from period to period, this may be evidence of timing differences in variable items such as financial account items or large, “irregular” current account transactions. Large net errors and omissions arising during periods of exchange rate volatility may indicate problems with the currency conversion methods used in compiling the accounts. Changing net errors and omissions when the behaviour of certain items changes may be evidence of relationships indicating that certain types of transactions are under-reported. For example, a positive net error and omission item coinciding with an increase in imports may indicate that trade credit liabilities are under-reported.”
Net errors and omissions, in reality, are the item that,
– balances the total of the current account balance, which consists of exports + service revenues + other revenues – imports – service expenditures – other expenditures,
– the capital account, which consists of migrant transfers + non-produced and non-financial assets,
– the financial account, which consists of direct investments + portfolio investments + other investments,
– increases or decreases in official foreign exchange reserves, and reserve assets consisting of payments made to the IMF or loans received from the IMF.
It is the item that balances the total of these balances to zero.
These four balances may carry a positive or negative sign. According to balance sheet logic, the sum of these four balances must equal zero. As defined by economist Mahfi Eğilmez, “However, due to various recording errors or omissions, the sum of these accounts may be greater than or less than zero in practice. The balance of payments is a balance sheet based on an accounting system maintained according to the double-entry bookkeeping method, so by definition it must be in balance.”
Therefore, to achieve balance, the resulting difference is recorded with an opposite sign under the heading ‘net errors and omissions,’ thus bringing the balance of payments into equilibrium. In other words, if the sum of the current account, capital account, financial account, and reserve assets equals ‘zero,’ there are no “errors” or ‘omissions.’ However, if this balance is not achieved and there is a ‘positive difference’, it means that there is an inflow reflected in the accounts but whose source is unknown. If the total in question creates a ‘negative difference’, this time there is an outflow reflected in the accounts, but whose source is unknown.
According to data from US-based TheGlobalEconomy.com, Turkey’s net error and omission item, which does not appear to have been eliminated, reached $23.737 billion in 2022, the highest Net Errors and Omissions (NEO) value in the world. Immediately afterwards, this development reversed, with the NEO value turning to minus $14.062 billion in 2023. This translates to nearly $24 billion in inflows of unknown origin, turning into $14 billion in outflows of unknown origin the following year. Therefore, this two-year period alone shows that there were approximately 40 billion dollars in inflows and outflows of unknown origin. World Bank data for the subsequent period also shows that the unidentified outflows that began in 2023 continued in 2024, amounting to 12 billion 696 million dollars. Central Bank data also shows that these unidentified outflows reached 15 billion 422 million dollars on an annual basis by the end of June 2025.
Economists briefly assess the reasons for and effects of these developments as follows:
– The negative NEO item indicates that there were unrecorded foreign exchange outflows during that period that could not be explained by the current, capital and financial accounts.
– The emergence of negative values in this item, especially during periods of crisis or uncertainty, signals weak economic stability.
– In the case of Turkey, these negative spikes observed since 2022 bring to mind financial concerns, a crisis of confidence, and unrecorded activities in capital movements.
In Turkey, the sharp fluctuations experienced, particularly after March, significantly disrupted the balance of payments table, and it is known that reserves were used to close the resulting deficit. In Turkey, especially in the period after 2023, while the Central Bank frequently implemented reserve accumulation/swap-based strengthening policies, positive inflows from NEO supported these reserve policies. While FDI in Turkey has generally remained around $8–10 billion annually over the past 10 years, it reached $24 billion in 2022, indicating that the economy is financed by ‘uncertain and short-term inflows’ rather than long-term investment.
In this context, portfolio investments showing entries such as share and bond purchases and sales can sometimes turn into hot money outflows. Items such as bank loans, deposits and commercial loans also define entries such as banks’ external debt rollovers and companies’ foreign deposit movements. Positive NEO, which directly affects Central Bank reserves, reduces reserve losses, while negative NEO increases reserve pressure. A high NEO from direct investments indicates dependence on short-term/uncertain sources rather than long-term investments. NEO plays a ‘balancing role’ especially during periods of outflows from portfolio investments.
Therefore, Turkey’s heavy reliance on the NEO item in recent years indicates fragility in reserve management and a decline in financing quality. In other words, instead of official and permanent capital inflows, increasingly volatile ‘uncertain foreign exchange flows’ have become the primary asset item that offsets the growing current account deficit and rapidly deteriorating reserve balance. This situation continues to dampen hopes for the recovery of the Turkish economy, which has long been dependent on external sources, because, as economists emphasise, NEO is not a permanent source of financing, and therefore, in terms of reserve policies, direct investment and debt rollover should be strengthened by 2025.
However, the high interest rate policies persistently pursued today, far from encouraging direct investment, are paving the way for the collapse of existing investments and for those who can find opportunities to leave Turkey and migrate to countries where they can survive. This high interest rate pit, which is said to have been dug to curb exchange rates, is rapidly climbing, having long surpassed 40 lira, due to the increasingly scorching foreign exchange reserve drought and the impact of US President Donald Trump’s heavy customs tariffs, which have caused the dollar to stagnate worldwide and even decline against major currencies such as the euro and sterling.
In short, when we examine the CBRT’s data in detail, we see that reserves began to recover in January. During this period, the NEO item remained negative. However, when we reach March, as we all know, reserves fell sharply, especially after 19 March; and, of course, the NHN item had a supporting effect on reserve usage during this process. Subsequently, in April and especially in May, the start of a positive trend in NEO and the strong reserve increase in May indicate that reserve pressure has eased; in other words, the inflow of funds to cheaper Turkish assets is increasing.
The reason we are seeing these flows despite rising unemployment is also clear here. The data shows that reserves have returned to their previous levels in nominal terms and that there has been a recovery in net reserves. In short, negative developments in the NEO item (particularly the March outflow) increased reserve usage and depleted the Central Bank’s reserve buffer. Subsequently, the NEO item turning positive in May and the increase in reserves signalled that flexibility could once again be gained in reserve policy. Although the real reserve increase seen quarterly indicates a recovery, supported by the NEO item, the NHN item, in other words, the increase in inflows and outflows of unknown origin into the country, reveals the uncertainty of the sources of the apparent recovery process.
Putting all this together, stepping back, shielding our eyes with our hands, and looking ahead to the more distant future, it is becoming increasingly impossible to see anything other than the smoke from the fires around us and the vague spectres rising from the dry air waves over the parched land.
¹https://www.imf.org/external/pubs/ft/bop/2014/pdf/BPM6_08.pdf