OECD urges Turks to stay on track with needed changes

ANKARA – Turkey must boost structural reforms, cut social security and pension contributions and free up its labor market to consolidate its economic stability, the OECD said in a report published yesterday. The Paris-based Organization for Economic Cooperation and Development also urged Turkey, a European Union candidate, to simplify business regulations, phase out farm subsidies and tackle serious shortcomings in primary and secondary education. «The medium-term prospects of the economy remain strong, provided the underlying fiscal and monetary policies remain on track and are backed by further progress in structural reform,» said the report, unveiled in Ankara. Failure to continue reforms would leave Turkey vulnerable to the kind of market volatility that saw the lira currency lose up to 25 percent of its value earlier this year and forced the central bank to raise the cost of borrowing by 425 basis points. The OECD said the government should aim to achieve a primary surplus, which excludes interest payments, above target during economic upswings. Turkey targets a total public sector primary surplus of 6.5 percent of gross national product in 2006. «The central bank needs to restore inflation to the desired path,» it added, following a recent spike in prices. The bank has said it does not now expect to hit its year-end target of 5 percent but hopes to reduce inflation to 4 percent in 2007. Central bank OECD Secretary-General Angel Gurria told reporters after talks with Foreign Minister Abdullah Gul that boosting the central bank’s credibility was key to lowering interest rates. Many observers criticized Turkey’s central bank and its newly installed governor Durmus Yilmaz during the May-June turbulence, saying they waited too long before raising rates. «(Fighting inflation requires) difficult decisions, sometimes painful decisions, politically sometimes unpopular decisions, but they cannot be avoided,» Gurria said. Turkey also needs to attract more foreign direct investment to help finance its bulging current account deficit, he said. In its report, the OECD focused on labor market rigidities, saying cumbersome taxes and regulations and a high official minimum wage hampered the creation of new jobs. Turkey’s official unemployment rate stood at 8.8 percent in the three-month period from May to July, down from the same period in 2005, but the real figure is believed to be much higher due to a large unregistered economy. Unemployment is one of the biggest problems facing the government, which has presided over economic growth averaging nearly 8 percent in the past four years following a 2001 financial crisis. The center-right government faces an election in 2007 but, anxious not to annoy its main creditor, the International Monetary Fund, it has ruled out a populist spending spree. The OECD said Turkey should continue the process of moving from agricultural subsidies to direct income support for farmers. Farming still employs about a third of the Turkish work force but is dogged by poor productivity.