Turkey's social security reform is important because it will show it is sticking to its reform agenda even though the reform's financial impact in the near term will be minimal, the World Bank said on Monday.
The bank's Turkey country director Ulrich Zachau also told Reuters in an interview that the country's large current account deficit will stabilise or possibly come down as data showed its growth rate softened in the second quarter of 2007.
Turkey's re-elected AK Party government has vowed to press ahead with a series of reforms, including the social security package that will raise the retirement age and simplify the system as part of efforts to curb a bulging deficit. "My understanding is that for the short term social security reform is very high on the government's agenda... It will be a demonstration of continued commitment to this particularly important reform and signal to the world this government is committed to reforms, which they are," Zachau said.
The government has said it will implement the social security reforms at the start of 2008, after former president Ahmet Necdet Sezer vetoed them and appealed to the Constitutional Court. The court called for some changes. Zachau said the reform would create a more equitable welfare system. The current account deficit is a significant concern for Turkey and the government is watching it closely, he said.
"My prediction is that the current account deficit will stabilise or possibly come down with slower growth," he said. Turkey's economic growth rate slowed to 3.9 percent in the second quarter of 2007 from an average rate of 7.4 percent over the past four years. The goal should not be to reduce the deficit to zero but to make it sustainable as Turkey's economy has a different structure to countries recording current account surpluses, Zachau said.
Turkey is more resilient to global economic shocks compared to five years ago thanks to its higher foreign exchange reserves and continued prudent fiscal regime, said Zachau.
Maintaining high growth rates will hinge on global economic developments that are not under Turkey's control, he said, but the country could grow above 5 percent in the medium term. "Turkey continues to be an attractive location for foreign investors... I predict that foreign direct investment will remain high," Zachau said.
The government hopes to attract $20 billion foreign direct investment in 2007. The bank expects to continue to lend Turkey around $1.5 billion annually in the coming years, as it has done in the last four years, but this will depend on the government's needs, Zachau added.