US embassy cable - 05ANKARA6399

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006399 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
NSC FOR MCKIBBEN AND MERKEL 
 
E.O. 12958: DECL: 10/24/2010 
TAGS: ECON, EFIN, ECIN, IMF 
SUBJECT: IMF PROGRAM: GOT ACCEPTS FISCAL AUSTERITY,NEEDS 
MORE TIME ON SOCIAL SECURITY BILL 
 
REF: ANKARA 6292 
 
Classified By: Economic Counselor Thomas C. Goldberger for reasons 1.4( 
b) and (d). 
 
1. (C) Summary: Though the GOT has accepted the IMF's 
fiscally austere 2006 primary surplus target, the GOT has 
again run into fierce delaying tactics by the political 
opposition party on the social security reform legislation. 
Fund staff (strictly protect) is awaiting a decision from IMF 
Management on a compromise package that would allow a program 
review to go forward, yet give the GOT a bit more time to 
pass the social security legislation.  With parliament having 
passed the banking reform legislation and having accepted the 
Fund's push for what is effectively a tightening of fiscal 
policy, Fund staff has accepted GOT arguments that time will 
help deal with the domestic political controversy over social 
security. End Summary. 
 
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GOT accepts fiscally-tight 2006 budget 
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2. (SBU) The IMF mission had hoped to wrap up a draft LOI the 
week of October 17-21, having reached agreement with the GOT 
on the critical primary surplus target (see reftel) October 
14.  The GOT had argued that major privatizations should 
entail a reduction in the overall public sector primary 
surplus target, recognizing the loss of these companies' net 
contribution to the surplus.  However, the GOT eventually 
acceded to the IMF's argument that maintaining the 6.5% 
target as a tool to restrain domestic demand would help to 
restrain import growth and the ballooning current account 
deficit.  The GOT agreement paved the way for the GOT to meet 
the October 17 constitutional deadline for submission of the 
budget. 
 
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Banking Law Passes 
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3. (SBU) In another key requirement of the program, the GOT 
succeeded in securing parliamentary passage on October 19 of 
the banking law, three articles of which President Sezer had 
vetoed last spring.  The President may send the legislation 
to the Constitutional Court but he cannot veto it a second 
time.  Thus, the IMF requirement is met. 
 
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But Social Security reform again delayed 
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4. (SBU) However, the other key structural reform 
requirement, social security reform legislation, is once 
again bogged down in a fierce opposition party filibuster in 
the Parliament's Budget and Planning Commission.  As they did 
in June, the opposition CHP party is slowing down the 
legislation as much as possible and attacking the GOT for 
"kowtowing" to the IMF.  Even though the Social Security 
Administration, which is piloting the reform, consulted with 
labor unions last winter, the labor unions have joined the 
fray, calling for the Social Security reform to be considered 
in the Economic and Social Council.  The unions argue that 
the legislation has never been heard in the Council, a forum 
in which they are represented.  State Planning Organization 
Deputy Under Secretary Birol Aydemir confirmed press reports 
that the the Budget and Planning Commission had stopped 
deliberations on the social security bill, and that the Prime 
Minister had decided to put Social Security on the agenda for 
a November 1 meeting of the Economic and Social Council. 
Aydemir was hopeful that after discussing the issue at the 
Council, the GOT would be in a stronger position to push the 
legislation through parliament.  Aydemir even thought the CHP 
might stop its delaying tactics.  On the other hand, press 
and some contacts are reporting that the commission would 
only work on the social security legislation after completing 
work on the 2006 budget, which could delay consideration 
until December or even January. 
 
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IMF Considering Going Ahead with Letter of Intent 
--------------------------------------------- ---- 
 
5. (C) Despite their frustration with the repeated delays in 
passing the critical social security reform legislation, the 
IMF mission still in town has proposed that Fund Management 
consider going ahead with a Letter of Intent that would allow 
the first program review at least to go forward.  The IMF 
Resrep told econoff October 24 that the mission is 
recommending giving the GOT one more review period to enact 
the legislation, taking into account both the GOT's 
willingness to effectively tighten fiscal policy and the 
likelihood that more time will help the GOT deal with 
domestic opposition on social security.  The Resrep said the 
Fund is only considering this because of the importance of 
the agreement on fiscal policy.  Central Bank Vice-Governor 
Erdem Basci--a supporter of the reform--pointed out to 
Econcouns October 24 that the reform is very long-term: he 
believes that a few months delay should not be important in 
economic terms, so long as it eventually passes. 
 
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Other Issues 
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6. (SBU) The Resrep said Fund staff was in agreement with the 
Turkish authorities on other issues.  The two sides had 
compromised on the issue of an "amnesty" on social security 
premia arrears.  (The IMF convinced the Prime Minister to 
pull back from his public announcement of an amnesty last 
spring, pending further study by an IMF technical assistance 
mission in the summer.)  The Resrep said the compromise 
agreement entails a partial amnesty of small-scale social 
security premia arrears, of which there are a large number of 
cases. People that have large arrears however, will be looked 
at case-by-case with decisions taken according to ability to 
pay. 
 
7. (SBU) The Resrep also said the IMF had agreed to a 
"decent" increase in the investment budget within the broader 
fiscal targets--a key GOT priority.  However, Aydemir said 
the increase was "not much," and cautioned against using the 
headline numbers for comparision, since 2006 budget figures 
use a new methodology and are not directly comparable with 
2005. Basci noted that the methodological changes for the 
first time gather all general government spending within the 
budget. 
 
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Combining First and Second Reviews 
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8. (C) The Resrep said the mission's proposal to IMF 
Management entailed an LOI on a combined First and Second 
Review.  He did not rule out the possibility, however, that 
Management could opt to propose only a First Review to the 
Board, given the delay on social security.  Central Bank 
Vice-Governor Basci reconfirmed that the GOT continues to be 
in a comfortable financing situation, looking for the IMF 
approval principally for the "signalliing effect." 
 
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Comment 
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9. (C) Despite repeated GOT claims that it would pass the 
social security reform very soon after parliament opened, the 
opposition has returned to its delaying tactics.  Post has no 
reason to doubt that the GOT supports the reform.  In the 
current climate of domestic frustration--and opposition 
demagoguery--over external pressure by the IMF and the EU, 
Fund staff may be right to give the GOT a little more time on 
social security. 
MCELDOWNEY