US embassy cable - 05ANKARA4530

UNCLAS SECTION 01 OF 02 ANKARA 004530 
 
SIPDIS 
 
DEPT FOR EB/OMA AND EUR/SE 
TREASURY FOR CPLANTIER 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EFIN, TU, IMF 
SUBJECT: IMF RESREP SEES COMPRESSED FALL CALENDAR, INCREASED 
CURRENT ACCOUNT CONCERNS 
 
 
1.(SBU) Summary: In a tour d'horizon with the Charge, the 
IMF Resrep pointed out that the delay in passing Social 
Security legislation has further compressed an already- 
packed calendar of required actions from September through 
November, just as the GOT is beginning EU accession 
negotiations.  He also said the Fund's view of the current 
account deficit has shifted--they no longer expect it to 
self-correct any time soon. Unfortunately, there are no good 
policy tools available.   Lamenting the GOT's serial 
proposals for tax exemptions and amnesties, he wished senior 
GOT politicians would put more effort into tax compliance. 
End Summary. 
 
Compressed Fall Calendar: 
------------------------- 
 
2.(SBU) In a wide-ranging first meeting with the Charge 
d'Affaires, the IMF Resrep noted that the GOT's failure to 
pass the Social Security legislation in late June means that 
this legislation will be added to a series of actions the 
GOT is required to take between September and November, just 
as it is beginning accession negotiations with the EU.  The 
Resrep believed the GOT sincerely made an effort to push 
through the legislation, but miscalculated how much time it 
would take, underestimating the ferocity of the opposition's 
delaying tactics. 
 
3.(SBU) Now, however, the GOT faces an extraordinary amount 
of work in the fall. Early in September an IMF mission plans 
to come to begin work on the Second Review.  During 
September (assuming parliament is called back earlier than 
its beginning-of-October start date), the GOT will need to 
pass not only the Social Security law, but also the law 
merging the three Social Security Institutions.  It will 
also need to pass a law allowing the state to pay the health 
insurance premia for low-income citizens.  Also in the fall, 
the GOT is supposed to pass a law refoming personal income 
taxes--a reform on which the GOT has yet to make any 
proposals to Fund staff.  The GOT also needs to develop, 
with IMF technical assistance, a comprehensive strategy on 
Social Security arrears.  This, too, will require 
legislation.  Finally, the GOT will need to override 
President Sezer's veto of three articles of the Banking Law, 
and the GOT and the BRSA (Bank Regulatory and Supervisory 
Agency) will need to work with the IMF on implementing 
regulations for the Banking Law. 
 
Front-Loaded Structural Reform in the Program: 
----------------------------------------- 
 
4.(SBU) Whenever GOT officials are asked how Minister 
Babacan will be able to handle both his macro/IMF 
responsibilities and his new EU negotiator job, their 
standard line is that the structural reform under the IMF 
program is front-loaded. The theory being that once Babacan 
wraps up the first year of the program with its heavy 
structural reform agenda, he will be freer to work on EU 
matters.  Babacan himself repeated this line to the Charge 
in a July 28 meeting (septel). 
 
5.(SBU) As the list of actions described above suggests, 
they are right to say the structural conditionality is front- 
loaded, and the Resrep confirmed this.  He went on to 
explain, however, that the Fund deliberately put most of the 
structural conditionality into the first year of the 
program, knowing full well based on past experience that the 
GOT will be slow to implement them, and the timing of the 
actions will slip. 
 
6.(SBU) The Resrep described the current period as one of 
transition, with a shift in the program from an emphasis on 
the macro targets to more difficult structural 
conditionality.  Whereas there is a broad consensus in the 
GOT in support of the macro policies, including the fiscal 
austerity, there is far less of a consensus around the 
structural reforms. 
 
Social Security Follies: 
---------------------- 
 
7. (SBU) The Resrep explained why Turkey's current 
unreformed social security system was so badly in need of 
reform.  The system combined extraordinary generosity with 
weak enforcement of premia payments.  Aside from allowing 
people to retire after only twenty years, i.e. in their 
forties, pension payments are not taxable, allowing retirees 
in some cases to earn a higher after-tax income than when 
they were working. 
 
Structural Barriers to Employment: 
--------------------------------- 
 
8. (SBU) Employers' social security payments are an 
important component of Turkey's relatively high "tax wedge," 
i.e. payroll taxes.  He said while the level is comparable 
to some central European countries it is high compared to 
other OECD countries or Emerging Market countries.  Another 
deterrent to hiring is Turkey's high cost of severance: one 
month per year worked with no cap.  He said the Fund is 
encouraging the GOT to look at these kind of structural 
barriers to employment, including the absence of employment 
agencies. 
 
If Only they Focused on Tax Compliance: 
----------------------------------- 
 
9. (SBU) As he has before with econoff, the Resrep lamented 
the Turkish political class' obsession with exemptions and 
amnesties.  If only they could make a priority of 
enforcement of tax and social security premia payments, they 
would give more credibility to their tax system, yield large 
increases in collections and thereby be in a position to 
begin cutting rates or spending more on budgetary 
priorities. 
 
IMF Shifts on Current Account Concern: 
-------------------------------------------- 
 
10.(SBU) Whereas over the past two years, Fund officials 
have tended to downplay the risks associated with Turkey's 
large current account deficit, for the first time the Resrep 
admitted there had been a shift in Fund thinking towards 
greater concern.  Mirroring independent analysts' concerns, 
the Resrep said unlike last year, there is less and less 
likelihood of the current account deficit self-correcting. 
Note: Though he did not say why, many economists point to 
the role of high oil prices keeping the trade deficit wide, 
and the continued flood of portfolio investment preventing 
an adjustment in the exchange rate which would moderate 
import growth and keep exports competitive. End Note.  On 
the other hand, the Resrep said there are no good policy 
options to deal with the problem.  The Central Bank cannot 
tighten monetary policy and with the primary surplus target 
of 6.5% of GDP already one of the highest in the world, the 
GOT can hardly tighten fiscal policy.  The Resrep did note 
one bright spot relating to the financing of the current 
account deficit: the apparent pick-up in FDI, in particular 
from privatization transactions. 
 
McEldowney