Turkish government’s plan for big pension rises worries experts

ANKARA (Reuters) – Turkey yesterday announced a state pensions increase above targeted inflation which could raise concerns at the International Monetary Fund as it monitors the country’s $16 billion loan accord. Economy officials and market watchers said the start of an IMF review this month could be delayed until Turkey details how it will fund the hike and the IMF evaluates the plan. Prime Minister Recep Tayyip Erdogan told a meeting of his party in Parliament the pensions would be increased by 10 percent in the first half of 2004 and another 10 percent in the second half. The announcement triggered sales on financial markets ahead of the expected arrival in Turkey of an IMF team in the coming days. The main share index fell 3.47 percent from a record close on Monday and bond yields edged higher. The government is targeting 2004 inflation of 12 percent after its anti-inflation program succeeded in slashing consumer price inflation to 18.4 percent at the end of 2003 from 29.7 percent a year earlier. «We have accepted extra costs of 2,600 trillion Turkish lira ($1.9 billion) to provide some relief to our pensioners,» the text of Erdogan’s speech said. Primary surplus Erdogan said the costs would be met through savings by state institutions without giving ground on financial discipline and its target for the primary budget surplus – a central goal of the IMF program. However, analysts said the extra expenditure could trigger doubts about the government’s commitment to a tight fiscal policy ahead of local elections scheduled for the end of March. «The IMF will want to see what steps the government plans to take to keep to its primary surplus target before its inspectors arrive here,» said Garanti Investment analyst Ceyda Pekel. Economy officials said the government was set to introduce a new funding package on planned savings to meet the costs. They said this could push back the start date for the IMF review. One analyst said uncertainty about how the IMF would react to the hike may delay an expected interest rate cut. «We would not be surprised if the central bank waited to see the IMF response or at least the details of the funding package before cutting,» 4CAST analyst Caroline Gorman said. The pensions hike comes after a raise in the minimum wage announced last week which was set to cost 1,000 to 1,500 trillion lira ($731.5 million-$1.1 billion), the officials said. They said that with the pensions rise the total budgetary burden would be around 4,000 trillion lira ($2.93 billion). The government announced at the end of last year a 34 percent increase in the monthly minimum wage to a net 303.1 million lira ($216). Inflation below 20 pct It was announced during the weekend that Turkish inflation dropped well below 20 percent on an annual basis in December, beating the government’s IMF-backed targets by a clear margin and fueling expectations of a near-term interest rate cut. The latest figures cap a second year of dramatic government success in the fight against chronic high inflation and are a milestone in the country’s efforts to stabilize its economy. The State Statistics Institute said on Saturday the wholesale price index (WPI) rose a monthly 0.6 percent in December for a yearly rate of 13.9 percent, compared with a government target of 16.5 percent. The December consumer price index (CPI) was up 0.9 percent on the month for an annual rate of 18.4 percent. In December 2001, annual wholesale price inflation stood at 88.6 percent while the consumer price rise was 68.5 percent. By the end of last year, those figures had been slashed to 30.8 percent for WPI and 29.7 percent for CPI. Fresh rate cuts seen Lowering inflation is a key element of Turkey’s loan accord with the IMF, and analysts expect this decline to continue during 2004. «This is likely to encourage expectations of a rate cut,» said Banu Kivci Tokali, an economist at Dis Investment. «The figures show that inflation has remained better than targeted in the program through the year. Given the general economic pick-up this augurs well for 2004,» she said. The Turkish Central Bank last cut interest rates in October amid evidence of progress in the fight against inflation. The bank cut the overnight borrowing rate by three points to 26 percent and the lending rate by four points to 31 percent. The markets have increasingly been anticipating a fresh cut, which would help Turkey in its efforts to pay down an onerous domestic debt load. Next year, the government aims to bring annual price rises down further, to 12 percent, and the central bank targets single-digit inflation by 2005. However, analysts said any populist policies this year could jeopardize efforts to build on the recent success.

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