Identifier
Created
Classification
Origin
05ANKARA3907
2005-07-07 09:02:00
CONFIDENTIAL//NOFORN
Embassy Ankara
Cable title:  

FAILURE TO PASS SOCIAL SECURITY REFORM JEOPARDIZES

Tags:  EFIN PGOV TU 
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070902Z Jul 05
C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003907 

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER
NSC FOR MERKEL

E.O. 12958: DECL: 07/07/2010
TAGS: EFIN PGOV TU
SUBJECT: FAILURE TO PASS SOCIAL SECURITY REFORM JEOPARDIZES
JULY IMF BOARD VOTE

REF: ANKARA 3827

Classified By: Economic Counselor Thomas C. Goldberger for reasons 1.4(
b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 003907

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER
NSC FOR MERKEL

E.O. 12958: DECL: 07/07/2010
TAGS: EFIN PGOV TU
SUBJECT: FAILURE TO PASS SOCIAL SECURITY REFORM JEOPARDIZES
JULY IMF BOARD VOTE

REF: ANKARA 3827

Classified By: Economic Counselor Thomas C. Goldberger for reasons 1.4(
b) and (d).


1. (SBU) Summary: Partly as a result of parliamentary
obstructionism from
the opposition CHP, the GOT failed over the weekend to pass
social security
legislation that was a condition for a favorable first review
of its new IMF
stand-by program and release of an $800 million credit. The
GOT is sounding
out the IMF on the possibility of a waiver, citing its late
innings push to
pass the legislation and the political obstructionism of the
opposition party.
If the IMF does not agree to the waiver and the AKP
government does not call
back Parliament during the summer, board consideration of the
first review
will wait until the fall. End Summary.

Parliament Goes on Recess without Passing Social Security
Legislation:
--------------


2. (SBU) Despite extending the parliamentary session through
Sunday,
July 3 and adopting politically controversial procedures
(reftel) to
expedite parliamentary debate, the Turkish parliament ended
its session
without having passed one of the two laws required under the
IMF program's
first review. Though the parliament passed the banking
reform law over
the weekend, and, according to press reports, ten other laws,
the social
security legislation never made it to the floor of the
general assembly.

GOT Fishing for a Waiver:
--------------


3. (SBU) Despite the IMF Resrep having publicly reminded the
GOT last week
that it needed to pass both laws to get a board vote in July,
IMF Deputy Resrep
told econoff that GOT is now sounding out IMF management on
the possibility of
a waiver of the requirement to have passed the social
security legislation.
The Deputy Resrep doubted IMF management would be open to
this possibility,
since the GOT could have pushed harder earlier to get the
legislation through.
Alternatively, if it is sufficiently concerned, the GOT could
call parliament
into extraordinary session. Finally, he added that question
marks in other
areas of conditionality would probably add to the IMF's

reluctance to be
flexible. The GOT has approached the IMF staff about the
possibility of delaying
by one year the implementation of the social security reform,
citing the difficulty
of the administrative reforms required to merge three systems
into one.
According to press reports, the GOT has also agreed to a 10
percent (i.e. above
CPI inflation) wage increase for workers at state
enterprises, without having
consulted the IMF. The GOT is required under the program to
hold all public sector
wage increases to the program targeted rate of CPI inflation.
The Deputy Resrep
said the size of the covered work force is not that large,
but the absence of
consultation and the likelihood that this agreement would
whet the appetite of
the civil service unions when they negotiate with the GOT was
troubling.
Finally, the IMF has not yet obtained a clear approval of a
State Bank
privatization strategy, as required by June 30 under the
program.

Banking Law issues:
--------------


4. (SBU) The IMF understands that the version of the banking
law that was
finally passed conforms to what was earlier agreed to, but
has not yet seen
an English text to check. Because the banking law was passed
using the
expedited procedures, there is a danger it could be vetoed by
President Sezer
or referred by him to the Consitutional Court which has
struck down the use
of similar procedures twice in the past. According to the
Deputy Resrep,
in a narrow, technical sense all that is required under the
program is
passage by the parliament, but if the law does not come into
effect the Fund
will just require it be put through again in such a way as to
go into effect.

Turkish Treasury Cites Political Problem:
--------------


5. (SBU) On the other hand, Ozgur Demirkol, the Turkish
Treasury official
responsible for coordinating the IMF program, claimed that
the only issue
outstanding was the social security reform legislation. He
said Turkish
Treasury was focusing on the conditionality for the second
review. Though
he asserted he was not aware of a Turkish request for a
waiver, he said
Minister Babacan may be calling Managing Director Rato or
Deputy Managing
Director Krueger. Demirkol made the case for IMF flexibility
on political
grounds. Over the weekend, the CHP opposition party
protested the GOT decision
to apply expedited procedures that required deputies to
comment on entire
sections--rather than individual articles--of proposed
legislation (reftel).
Outraged by the GOT's expedited procedure, the CHP deputies
refused to
participate in the general assembly's consideration of the
banking law.
According to Demirkol, this puts the GOT in a difficult
position because
it looks like the GOT took a democratic shortcut under
pressure from the IMF.

Financing not a problem, for now:
--------------


6. (SBU) Both Demirkol and the Deputy Resrep confirmed that
the GOT has no
immediate need for the financing that would be released upon
board approval
of the review. From a fiscal perspective, the GOT is in no
urgent need of
the funds, being well ahead of its targeted borrowings on
external capital
markets, and with interest rates well below levels targeted
under the program
(thereby reducing Turkish Treasury's borrowing cost and
rollover requirements).
From a balance of payments perspective, the large flows of
portfolio investment,
and the Central Bank's continued purchases of foreign
exchange have maintained
adequate reserve levels.

Comment: Turks have Lost Credibility with IMF
--------------


7. (C) It is clear that the AKP government made a strong,
albeit last-minute,
effort to push through the social security legislation and
that it was stymied
by the opposition CHP party for political reasons not
directly related to the
substance of the reforms. However, as we have previously
reported, the AKP
government has used up any credibility and patience it would
otherwise have
earned with the IMF staff and management through its repeated
populist attempts
to get around its agreements with the Fund -- such as the
mid-May attempt to
introduce a social security amnesty just after the Board
approved the new program
in May. The IMF is therefore likely to be unsympathetic to
requests for a waiver.
Given the lack of an immediate financial need, there would
not seem to be a strong
reason to support a waiver. In fact, there are late signs of
renewed movement:
Deputy Prime Minister Abdullah Gul floated the possibility
July 6 that Parliament
could be called back during the summer to consider the
legislation. At the same
time, we should bear in mind that the AKP is under political
assault and perhaps
panicky as it attempts to square its commitments to the IMF
with domestic political
considerations.
MCELDOWNEY