Pension bill and IMF talks fail to relieve Turkish anxiety

By bne IntelliNews April 18, 2008

Bernard Kennedy in Ankara -

Nine years of standby agreements between Turkey the IMF look set to end with a bang rather than a whimper thanks to parliament's passing a bill to overhaul social security on April 17. However, against a backdrop of global financial crisis, political uncertainty and a slowıng economy, neither the financial markets nor the business community is in any mood to celebrate.

Widespread early retirement, evasion of contribution payments and high health costs have caused subsidies to the three public social security institutions to reach over 3% of GDP, not counting budgetary payments for health and social assistance. The bill just pased in parliament raises the minimum retirement age to 65 (albeit only for new entrants to the system), lowers the amounts of pensions relative to earnings, sets new health system user fees and tightens conditions for other benefits. The hope is that the institutions' deficits will be virtually eliminated by 2050.

The belated onset of the parliamentary debate triggered a surprise IMF mission to Ankara on April 4-10. Enactment of the bill will pave the way for the release of the $3.6bn in IMF credit that still hasn't been disbursed under the current standby accord before it expires on May 10.

Too little, too late

The flurry of activity in the capital was largely ignored on the Istanbul Stock Exchange, which closed flat on April 17 at 41,602. The stock market remains volatile due to global conditions and the closure case lodged against the ruling Justice and Development Party (AKP). The AKP is accused of trying to usher in an Islamist regime. The lira has repeatedly seen the weak side of 1.30 to the dollar, and typical government bond yields hover at around 18.5% compared with a Central Bank policy overnight rate of 15.25%.

Tufan Cömert, a strategist with Garanti Investment, says that the social security legislation has simply come too late. "This was expected to pass through parliament two months ago," he explains. "The market does not perceive that the government is committed to structural reforms."

The government is still considering whether to seek a fresh standby accord with the IMF - likely to be precautionary and unfunded - or to minimise the Fund's influence on economic policy by accepting only post-programme monitoring.

Yelda Yucel, senior economist with Yapi Kredi Bank, believes that the social security bill will bring long-term benefits, but warns that "the political impact could prove more important than the economic impact."

"With the economy slowing," she argues, tough clauses in the legislation could increase the opposition to the government. Year-on-year GDP growth was only 3.4% in the third and fourth quarters of 2007 and by March 2008, capacity utilisation in manufacturing industry had fallen below last year's level.

Besides the growth rate, the current account deficit of 6% of GDP and stubborn 9% inflation are vexing Turkish economists. By contrast, once-gaping fiscal deficits have narrowed in recent years, and fiscal sustainability issues, including the social security deficits, are attracting less attention.

Ironically, the initial impact of the social security legislation on subsidies is expected to be upward due to the introduction of a universal health insurance system. By contrast, the anticipated savings on pensions subsidies will be spread over many years. There are also concerns about the possible impact of Constitutional Court objections and recent limited concessions to workers on the overall level of savings. "Reform is essential because the deficits are growing exponentially every year," comments Bulent Pirler, Secretaty General of the Turkish Confederation of Employer Associations (TISK). "However, as the system is mainly financed by employers and workers, we think it should have been made more autonomous. We are also concerned that employers will face new obligations.... The health costs of the social security institutions have risen 2.5 times in the last two years and we are not sure if the universal health insurance system will be a solution... The system is likely to require many further adjustments."

According to Pirler, social security contributions paid by Turkish employers and employees - which add up to at least 33.5% of gross salary, excluding unemployment insurance - are the highest in the OECD. The level of contributions, "greatly affects our competitiveness and feeds the informal economy," he asserts, calling for an effort to reduce it in the context of a strategy to increase employment.

From a social policy standpoint, issues remaining to be addressed include the effect of later retirement on soaring youth unemployment and the absence of old-age security for the millions who are out of work or only informally or marginally employed. Unemployment insurance and statutory benefits for the poorest in society are minimal.

The private health sector is also looking to the future with trepidation. One clause in the social security bill imposes a limit of 20% on the the mark-up in fees which private hospitals can charge social security patients referred to them. A last-minute agreement to double the limit "may keep some services going," remarked one private health sector spokesperson gloomily.

Send comments to The Editor

Related Articles

Turkey approaches day of reckoning on economic reform

Kivanc Dundar in Istanbul -   The unexpected success of President Recep Tayyip Erdogan’s Justice and Development Party (AKP) in this month’s general election should bring much-desired political ... more

Macedonia kept on hold as Balkans edges towards EU goal

Clare Nuttall in Bucharest -   Macedonia’s EU accession progress remains stalled amid the country’s worst political crisis in 14 years, while most countries in the Southeast Europe region have ... more

Turkey and America seen on course for confrontation in Syria war

John Davison of Exaro - Military action by Turkey against Kurdish rebel forces in Syria raises the prospect of a direct clash with the ... more

Notice: Undefined index: subject_id in /var/www/html/application/controllers/IndexController.php on line 335