APPENDIX I: Privatization 1/
APPENDIX II: Social Security Reform 1/
The financial position of Turkey’s state social security system has deteriorated markedly in recent years, with rising deficits imposing an increasing burden on the budget. The financial imbalances are occurring despite a relatively young population, and reflect deep-rooted structural problems that were exacerbated by the abolition of the minimum retirement age in 1992. Also, the interaction between pension and health insurance and other social security schemes (e.g., severance pay and social assistance) is having adverse effects on employment creation, the level and intermediation of savings, and social equity, with inadequate targeting of social assistance to the poor and elderly. Further deterioration in financial performance is expected in the coming years unless major reforms are implemented.
Proposals to reform the pension system and other elements of the government’s social welfare system have been under consideration for some time. In 1994, the government, with financial assistance from the IBRD, 2/ commissioned a study to clarify the reform options available in regard to pension insurance; a related study was also initiated on reform options in health care provision. The study on pension system reform, undertaken by the ILO, was completed in 1995 and, at the government’s initiative, has been widely disseminated in Turkey as a means for promoting public debate on social security reform. The results of a related study on health insurance, prepared by the Australian Health Insurance Commission, have also recently been released.
APPENDIX IV: An Econometric Analysis of the Determinants of Inflation in Turkey 1/
Messrs. Bass, Mecagni, and Nolan, and Ms. Tan.
The industrial production and capacity utilization indices are collected monthly as well as quarterly, based on the results of separate surveys. The monthly industrial production index covers some 2,500 firms, including all public sector firms and most private sector firms; the coverage of the monthly capacity utilization index is slightly wider. The sample sizes for the monthly and quarterly data are different (in the case of both measures): for the industrial production index, for example, public sector firms–which tend to be larger firms where information is more readily accessible–are relatively more heavily represented in the monthly index compared with the quarterly index, which includes many more smaller firms found in the food and beverage and textile and apparel industries.
The Turkish Agricultural Bank (Ziraat Bank) extends loans to farmers on concessionary terms. Although these loans are not legally guaranteed by Treasury, the Government from time to time has required the Treasury to offset nonperforming loans.
These are funded by the Turkish Agricultural Bank, which is later reimbursed from the Support and Price Stabilization Fund (an extrabudgetary fund). The fertilizer subsidy program is the most important one; others, such as livestock incentives, are relatively small.
The compensation often falls short of the duty loss claimed.
Investment allowances, which were reduced in mid-1994 to 70 percent for undeveloped regions and 20 percent for developed regions, were returned to their original levels of 100 percent and 30 percent, respectively, in mid-1995 to encourage investments in the newly established industrial zones. Unlike in the past, the allowances were also made available to small firms.
Other measures, such as land allocation, energy support, and subsidized credit have been approved but not yet implemented.
The Undersecretariat for the Treasury and Foreign Trade does not keep track of developments after issuing the certificates.
Trend inflation is measured as the annualized rate of increase of an index constructed from the seasonally adjusted WPI and CPI.
The compulsory minimum level of schooling is 5 years, but this is expected to be raised to 8 years very soon.
The HLFS is the best available source of labor market statistics in Turkey. It tracks unemployment reasonably well, but not with precision due to its small sample size (approximately 40,000 individuals aged 12 and above are surveyed out of a labor force of over 20 million) and the weakness in the calculation of the “blow up” factor. The blow up factor was recently updated using the results of the 1990 census–data from 1988 have been revised using the new “blow up” factor; the population projections used in the post-1990 data have also been adjusted.
Urban unemployment was 12.8 percent in April 1994 and 11.1 percent in October 1994.
Between 1989 and 1991, gross wages of private sector workers increased by 355 percent, gross wages of public sector workers increased by 386 percent, and net salaries of civil servants increased by 228 percent, in nominal terms. In real terms, the increases were: 71 percent for private sector workers, 83 percent for public sector workers, and 23 percent for civil servants.
Fund staff have undertaken substantial revisions to the public accounts to allow for sizeable fiscal and quasi-fiscal outlays not captured in the authorities’ measurement system. Details of the revisions are described in footnotes to the relevant tables.
The addition of the general government borrowing requirement (a cash-based concept) and the SEE borrowing requirement (an accrual-based concept) to obtain a PSBR has important shortcomings. Much of the SEE borrowing requirement represents the accrual of liabilities to the general government, rather than increased liabilities to the non-governmental sector.
These are the following: Capital Market Fund (SPK), Savings and Deposits Insurance Fund (TMS), Foreign Exchange Risk Guarantee Scheme (FERIS), Insurance Inspection (SMK), Student Election Fund (OSYM), Publicity and Promotion Fund (TF), and Social Solidarity Fund (SYDFF).
In the staff presentation, these transfers are classified as an outlay of the budget and a revenue for the EBFs, netting out in the finances of the general government.
This figure of net debt repayment to banks does not square with the sizable increase in banks’ claims on nonfinancial public enterprises reported in the monetary survey (Table A33). Treasury staff argue that the data reported by banks to the CBT overstate banks’ claims on SEEs by misclassifying claims on extrabudgetary governmental entities.
Government transfers to SEEs take one of two forms: direct transfers from the budget and, since 1992, the provision of marketable government paper to selected enterprises by the Treasury. The second form of assistance is not treated as a budgetary transaction, although legal authorization for such transactions is provided through special articles of the budget law. In this chapter, such operations are included in extra-budgetary transfers.
Under this scheme, a certain percentage of the cost of the investment may be deducted from the taxable income. This percentage varies according to regions and sectors.
See paragraphs 8 and 12 of the authorities’ letter of intent (EBS/94/114, 5/27/94), and pp. 8-9 of the accompanying staff report (EBS/94/114, Supplement 1, 6/17/94).
The stock of resident FX deposits fell by 20 percent during April.
The charts portray the price of foreign currency, the inverse of the exchange rate; consequently, the floor on the exchange rate is a ceiling on the price of foreign currency.
Broad money (M2X) includes resident foreign currency deposits; lira broad money (M2) does not include such deposits (Table A33).
Growth in reserve money during the second and third quarters was more than fully accounted for CBT purchases of foreign exchange (Table A34).
See paragraphs 13 and 14 of the authorities’ letter of intent (EBS/95/28, 3/9/95).
With output expected to grow by 3 percent on the 1994 level, the constant real balances assumption implied a modest increase in the velocity of M2X.
These inflows initially took the form of domestic banks selling foreign assets to buy government paper (reflected in a large jump in their net open FX position (Chart 4)), but expanded to include portfolio inflows and asset repatriation by non-bank residents as the year proceeded.
See SM/95/69, Appendix V (4/11/95) for discussion of the instruments of liquidity management employed by the CBT.
See EBS/95/142, (8/18/95) pp. 5-6, and attached letter of intent, and EBS/95/142, Supplement 1 (9/15/95) for fuller discussions of the policy understandings reached, and the considerations influencing the policy stance chosen.
A monthly Indicative path for reserve money for the second half of the year envisaged growth at a pace in line with the monthly inflation target of some 1 ½ percent.
Banks are required to sell a set fraction of the proceeds of exports of goods and services deposited with them to the CBT. This fraction has been reduced, in a series of steps, from 20 percent in April 1994 to 10 percent in June 1996.
Program targets focused on the wholesale price index, which the authorities view as the best indicator of broader price trends. Consumer prices rose more rapidly than wholesale prices during most of 1995, having increased at a slower pace during much of 1994; divergences in the price indices are usually interpreted as an indicator of the strength of domestic demand pressures, to which the CPI is deemed to be more sensitive.
Through early September, the Treasury had succeeded in selling nine-month and one-year paper; during October, the longest maturity sold was 153 days, which was to shorten to 145 days on November and 91 days in December.
Forward transactions were already allowed, but did not take place within the framework of a exchange market.
The central bank law imposes a limit on new CBT advances to the government in each fiscal year, set as a fraction of the nominal increase in budgetary outlays approved for the year; there is no restriction on the intra-year disbursements of these advances.
A small deposit money bank, SumerBank, was privatized in 1995.
Credit ratings by international agencies are available for a handful of individual banks operating in Turkey. Standard and Poor’s gave in May 1996 a rating of B+ on senior debt of one of the largest private banks in Turkey. In July 1996, Moody’s rated with D two banks, D+ the second largest bank in Turkey, and E+ another bank, on a scale ranging from A to E. Moody’s commented that the impact of the operating environment on a bank’s fundamentals meant that it would be unusual for a bank in Turkey to receive a rating above the C level.
See for instance, IBRD, "Performance Audit Report: Turkey: Financial Sector Adjustment Loans I and II", June 1994, prepared by the Operations Evaluation Department; OECD, "Turkey–Economic Survey, 1996", forthcoming.
Changes to the reserve and liquidity requirements were announced on July 22, 1996; details were not immediately available.
Estimates derived from data provided by the Banking Department of the CBT.
S&P and Moody’s downgraded their rating to noninvestment grades B+ and Ba3 in April 1994 and June 1994, respectively.
The official estimate of net portfolio investment in equity securities in1995 is about US$1.3 billion, in part reflecting repatriation of assets by residents. This amount fell short of the program projection premised on accelerated privatization (US$2.2 billion).
The Dresdner facility is a special arrangement between the Central Bank of Turkey (CBT) and the Dresdner Bank of Germany under which the Dresdner Bank acts as an agent of the CBT in mobilizing savings of Turkish citizens residing in Europe (mainly Germany). Under the scheme, Turkish citizens may open foreign currency accounts with the CBT, with maturity typically of 1-2 years, and interest rates on deposits and penalties for early withdrawal set by the CBT.
In June 1996, the Turkish Government notified the WTO that it intends to eliminate the trade restrictions justified under the WTO balance of payments clause as of January 1, 1997. These restrictions concern tariffs in excess of bound rates on 36 items, mainly transport vehicles, accounting for some 0.2 percent of 1995 imports.
Prepared by Ms. L. H. Tan.
SEEs, their subsidiary companies, and affiliated partnerships are governed by a decree law; joint-stock companies are governed entirely by commercial law.
The new law identifies certain “strategic enterprises” in which the state will retain “golden shares” in the event that over 49 percent is privatized. These enterprises include Turkish Airlines, Ziraat Bank and Halk Bank, TMO, and the Turkish Petroleum Company.
Some of the asset and share sales were made on installment payments or in terms of a foreign currency. The discrepancy between gross revenues and cash proceeds derives from interest on instalment payments and exchange rate variations.
Five percent of the shares in this company are already publicly owned.
Forty-nine percent of the shares in this company are already publicly owned and traded on the Istanbul Stock Exchange.
Prepared by Ms. L. H. Tan.
The IBRD has had a close dialogue with the government on social security reform since 1992-93; see the recent IBRD report, Turkey: Challenges for Adjustment (Report #150760TU, April 1, 1996), Chapter 3, for further analysis of the policy issues confronting the Turkish authorities.
ES contributions are deducted directly from civil servants’ salaries.
SSK’s low collection rate stemmed mainly from the failure of several SEEs to keep up with their premium payments. In 1995, the government took steps to remedy this problem, including: imposing stiffer penalties on overdue payments; appointing additional collectors and inspectors; and involving private banks in the collection process.
Upon retirement, SSK and ES members receive a lump sum payment (equivalent to approximately one month’s wages for each year worked) in addition to the monthly pension; BK members receive only their monthly pension. Benefits continue to accrue to the member’s spouse and dependent children upon his or her death.
This means that pensioners are assumed to share in the general increase (decrease) of prosperity if real earnings rise (fall) in the economy.
Contributions by self-employed persons would be subject to a floor of 50 percent of the minimum wage in the first year of membership, 60 percent of the minimum wage in the second year and so on, up to 100 percent of the minimum wage by the sixth year. Farmers and agricultural laborers would be entitled to a matching government contribution of 50 percent of the minimum contribution.
This appendix was prepared by Ms. C.H. Lim and L. Papi.
As in Bruno and Melnick, the aggregate demand schedule is derived from the standard open economy IS-LM framework where interest rates have been substituted from the model. The aggregate supply schedule is obtained from a three-factor production function.
Hence, an increase in E means appreciation.
Note that the RER, as defined here, is not an equilibrium exchange rate in the broader sense of being sustainable over the medium term
See World Bank (1995) for a more detailed exposition of the concept of financeable deficit and the required deficit reduction.
Most of the trade liberalization measures became effective from 1984 onward.
It should be recalled that the concept of “equilibrium” exchange rate used is not defined in RMS terms of a sustainable balance of payments over the medium term, but more narrowly to refer to the rate that yields a financeable deficit on goods and services given current patterns of capital inflows.
For simplicity, we assume a constant level based on the debt to GNP ratio in 1970 (25 percent).
The contemporaneous exchange rate is instrumented with past values of the exchange rate itself and other exogenous variables of the model. This was done to take account of the possible endogeneity of the nominal exchange rate variable given past policy of depreciating the nominal exchange rate in order to offset the impact of inflation on external competitiveness
Other exogenous variables, such as real government expenditures, were not signficant when included in the inflation equation.
1980 was chosen as the point of structural break on the basis that both the Turkish economy and the political system underwent significant changes. Furthermore, the F-test rejects the null that the coefficients are stable at more than 1 percent significance level.
It would be important to examine the role of expectations in inflation formation more thoroughly and incorporate it explicitly into the model.
Calvo, Reinhart and Vegh (1994) also find that policies of targeting the real exchange rate to enhance external competitiveness in developing countries have typically led to an undervalued real exchange rate. Their results show that depreciating the real exchange rate beyond its equilibrium level is likely to result in higher inflation as evidenced in Brazil and Columbia between 1979 and 1992.
See Chapter VI of the forthcoming World Economic Outlook. “The Rise and Fall of Inflation—Lessons from the Post-War Experience”.