VZCZCXRO1680
RR RUEHDA
DE RUEHAK #0592/01 0401652
ZNR UUUUU ZZH
R 091652Z FEB 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 3078
INFO RUEHDA/AMCONSUL ADANA 0384
RUEHIT/AMCONSUL ISTANBUL 9787
RUEATRS/DEPT OF TREASURY WASHDC

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