Causality Analysis Between the Net Error and Omission Component and Turkiye's Foreign Trade Balance: 1990-2024 Period

The purpose of this paper is to investigate the significance of the "net errors and omissions" (NEO) component in Turkiye's balance-of-payments for 1990 to 2024 and its relation to the foreign trade balance. Although the NEO item is theoretically considered a statistical adjustment for measurement errors, timing differences, and data incompleteness, the permanence and positive sign of this item in Turkiye have led to speculation about the existence of covert capital flows. This study answers the question if the NEO item is merely a reflection of statistical discrepancies or if it reflects changes in foreign trade dynamics. In methodology, the Toda-Yamamoto causality technique was used for annual data, and the analysis was performed using EViews. The results indicate that there is unidirectional causality from foreign trade balance to NEO item, but not vice versa. These findings imply that the NEO item does not function as an active factor in shaping the foreign trade performance, but as a "follower" vis-à-vis the foreign trade balance. As a rule, the NEO is considered as a mere statistical adjustment item on the reactive side and not as a driver on the main side of macroeconomic analysis, and also an indicator that reflects structural transformation in Turkiye’s statistics and exposes inconsistencies. In conclusion, this study gives new empirical evidence for Turkiye by revealing that the trade balance-NEO item causal relationship is unidirectional (from the trade balance to NEO), in other words, NEO acts as a result variable, not as a determinant of the foreign trade balance.