SOCIAL SECURITY REFORM DELAYS IMF REVIEW AGAIN

UNCLAS SECTION 01 OF 02 ANKARA 000592 SIPDIS SENSITIVE SIPDIS TREASURY FOR CPLANTIER E.O. 12958: N/A TAGS: EFIN TU SUBJECT: SOCIAL SECURITY REFORM DELAYS IMF REVIEW AGAIN REF: 05 ANKARA 6399 ¶1. (SBU) Summary: For the third time in the past year, parliamentary passage of critical Social Security reforms are holding up an IMF review and this time, the IMF says it will not consider a waiver. GOT officials insist they support the reform, but seem to prefer wearing down the parliamentary opposition rather than confronting them head on. Other structural reforms seem to be moving ahead, although often with missed deadlines, while Turkey continues to meet its macroeconomic targets. End Summary. -------------- -------------- New Political Strategy to Pass Social Security Reform? -------------- -------------- ¶2. (SBU) Once again the critical Social Security Reform reforms seem to be stalled in Parliament. The centerpiece of the reforms is the pension reform law that would institute parametric changes in pension formulae so as to reduce the ratio of the combined Social Security deficit to GDP by one percent in ten years, and eventually bring eliminate the deficit. Having tried -- and failed -- in both June and November to push this legislation through Parliament in the face of dogged political maneuvering by the opposition Republican People's Party(CHP),the GOT managed to convince the IMF to waive the performance criterion and approve the (much-delayed) first and second reviews in December. ¶3. (SBU) According to both the IMF Resrep and the Turkish Treasury, Fund Management is highly unlikely to bring the third review to the IMF Board absent enactment or near-certainty of enactment of this law. Along with the pension reform legislation, passage of the law merging the three social security institutions by January 31 is also a performance criterion. Both laws are still under consideration by a sub-committee of the Plan and Budget Commission of the Parliament. Labor Minister Basesioglu recently said he expected the merger legislation to be passed in February and the pension reform legislation in March. (On February 7, Basesioglu also said the GOT would not extend the retirement age all the way to 68, as originally intended, opting to stop at 65 instead. The IMF Resrep said the World Bank staff were studying the impact of this change to see whether it was significant enough for the IFI's to object.) ¶4. (SBU) Turkish Treasury IMF Department Head Ozgur Demirkol, told us that the GOT, up through the Prime Minister, realizes now is the time to pass the legislation, before getting too close to election season. The Labor Minister, both publicly and privately asserts the GOT's commitment to the reform. The IMF Resrep told us the Fund had agreed to a waiver in December based on a rough game plan worked out with State Minister Babacan. The game plan was to try to lower the political temperature on the social security issue: the IMF would keep a low profile in its public statements, and the GOT would hold a meeting of the Social and Economic Council in November to have a fuller consultation with stakeholders, especially labor unions. In doing so, the GOT hoped to undermine the opposition party's allegations of lack of consultation and IMF pressure. If this and the passage of time failed to prevent a renewed filibuster, the GOT would amend parliamentary procedures to allow multiple articles to be discussed in batches, thereby overcoming the filibuster. ¶5. (SBU) Though the Labor Minister was not explicit, the Resrep senses that the GOT's latest thinking is that it will take more time to wear down the opposition, and by downplaying the reform make its derailment less of a juicy political target for the CHP. As part of this strategy, the GOT is moving ahead on a third, politically popular, piece of social security-related legislation, a partial restructuring of Social Security premia arrears. On the pension reform legislation, the sub-commission is incorporating a number of IMF-acceptable changes that were recommended by labor unions. -------------- -------------- Slow but Appreciable Progress on Other Structural Reforms -------------- -------------- ¶6. (SBU) Though the Resrep expressed irritation at the GOT's belated compliance with other structural reform deadlines, Demirkol claimed all the other Third Review non-Social Security reforms were either completed or in train, even if there was some slippage on the timing: The Bank regulatory agency has announced its reorganization; the Ministry of Finance is establishing a tax policy unit; changes in the ANKARA 00000592 002 OF 002 corporate income tax are at the Prime Ministry; the comprehensive review of civil service wages and employment has been completed and is under review by the Under Secretary of Treasury; and the changes in the personal income tax are moving forward. -------------- Positive Macro Performance -------------- ¶7. (SBU) The Resrep confirmed there were no real issues on the macro side. The Resrep said 2005 GDP growth could end up slightly higher than the 5% program target, between 5.75 and 6%. Fund staff is sticking with its 5% target for 2006. He said the non-oil current account deficit seems to have stabilized in dollar terms, so if Turkey gets a break on oil prices, the current account deficit could stop deteriorating. He noted the improved composition of the financing of the current account deficit, with more FDI and a shift to longer-term borrowing. Although many analysts now expect 2006 inflation to come in higher than the target, with a bit of luck the target might be met. Though not a target in the program, the Resrep expressed concern about the stubbornly-high unemployment rate, with jobs not being created quickly enough to surpass the growth of the labor force. The danger is that the GOT will opt for politically-popular quick fixes, particularly in the run-up to elections. The IMF continues to oppose any move to cut payroll taxes until Turkey can better afford to do so, and the GOT does not seem interested in less headline-grabbing ideas to improve labor market flexibility, such as cutting companies' severance payment obligations. -------------- Comment -------------- ¶8. (SBU) Though the GOT may know what it's doing in dealing with the opposition, the continued delays in the IMF review, particularly if combined with other market-unfriendly news flow, hold the potential to rattle the markets. Though Turkish markets have been less and less reactive to IMF program setbacks over the past three years, an abundance of market-unfriendly developments are within the realm of possibility: the GOT not reappointing the Central Bank Governor, domestic political tensions, regional tensions and instability, rising interest rates in major world markets, and high energy prices. WILSON