US embassy cable - 03ANKARA5641

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 005641 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
 
 
E.O. 12958: DECL: 09/04/2013 
TAGS: EFIN, EINV, EAID, PREL, TU 
SUBJECT: AMBASSADOR'S MEETING WITH MINISTER BABACAN 
 
 
(U) Classified by Ambassador Eric Edelman.  Reasons: 1.5(b,d) 
 
 
1.  (C) Summary:  In a September 3 courtesy call, Ambassador 
urged State Minister Babacan to wrap up talks on the U.S. 
financial package quickly, stick to the economic reform 
program, and take concrete steps to resolve problems facing 
U.S. investors.  Babacan said he had instructed his staff to 
communicate to U.S. Treasury his acceptance of the 18 month 
disbursement schedule for U.S. assistance, which should pave 
the way for early congressional notification and signing of 
the agreement.  He agreed on the need to continue 
implementing economic reforms, and specifically emphasized 
the importance of meeting primary surplus targets for 2003 
and 2004.  Babacan acknowledged that foreign investment 
inflows were "negligible," and highlighted the government's 
efforts to streamline the foreign investment approval 
process.  End Summary. 
 
 
2.  (C) Ambassador opened his September 3 courtesy call on 
State Minister Babacan by urging the Minister to accept the 
18-month disbursement schedule for our financial assistance, 
so that the agreement could be notified to Congress and 
possibly signed during the September 22 Snow-Babacan meeting 
in Dubai.  Babacan said he had just instructed his staff to 
inform U.S. Treasury that Turkey accepted both the 
disbursement schedule and the four-year grace period.  With 
these issues resolved, he expressed hope the Administration 
could notify Congress right away.  Babacan added that signing 
the agreement this month would send a positive signal, and 
would help ease continuing public concerns about whether the 
money was linked to Turkey's decision on contributing troops 
to the stabilization force.  At the Minister's request, 
Ambassador agreed to advise Turkish Treasury once the 
notification went forward, and to ask Washington if we could 
provide the Turks with a copy. 
 
 
3.  (C) Ambassador noted that, despite disappointment over 
the March 1 vote on troops, the U.S. had a major interest in 
the success of Turkey's economic reform program.  Although in 
the end the costs of the war to Turkey had been much less 
than some had anticipated, the announcement of the U.S. 
package had played a critical role in stabilizing Turkish 
financial markets. 
 
 
4.  (SBU) The key now, the Ambassador continued, was for 
Turkey to take advantage of the current "window of 
opportunity" by pressing ahead with the reform program.  If 
the GOT completed the 6th IMF review on time, hit the 6.5 
percent primary surplus target (here Babacan interjected "for 
2004 as well as 2003"), moved ahead with scheduled 
privatizations, and resolved some of the problems affecting 
foreign investors, it would have a very good story to tell at 
year-end. 
 
 
5.  (SBU) Babacan said the program had achieved a lot, though 
there had been some delays.  He explained that the 4th review 
had been delayed due to uncertainty over Iraq and 
difficulties due to the fact that a new government had just 
taken office.  The 5th review had been delayed several weeks 
because the Turkish Parliament had insisted on studying and 
debating every piece of proposed legislation.  This, the 
Minister asserted, was actually healthy, and resulted in 
better legislation.  Aware of Parliament's interest, the GOT 
and IMF had set more "reasonable" deadlines for legislative 
action for the 6th review, leaving Babacan hopeful it would 
not be delayed. 
 
 
6.  (SBU) Babacan said the biggest issue for 2003 and 2004 is 
the budget.  Fortunately, the Prime Minister fully supports 
hitting the fiscal targets, which is critical given that 
there are "at least 15 ministers who want to spend more." 
The Minister cited as an example of the government's fiscal 
steadfastness its refusal to offer public workers a wage 
inrease greater than 12 percent, which has tentatively been 
set as next year's CPI target.  With Turkey's huge public 
debt stock, the Minister added, "we have no choice." 
 
 
7.  (SBU)  Ambassador warned Babacan that he likely would 
encounter skepticism from U.S. companies during his U.S. 
roadshow next week.  Although businesses are looking with 
interest at Turkey's economic progress, they remain concerned 
over the numerous business climate issues they see.  As the 
Vice President used to tell foreign visitors, the first thing 
that U.S. executives are asked when they go to their boards 
with foreign investment proposals is "how are other U.S. 
investors faring?"  In the case of Turkey, the answer to that 
question is that Motorola had been swindled out of $2 
billion, cola companies face discriminatory taxes, other 
companies face problems with sugar quotas and zoning 
questions, and our pharmaceutical companies suffer from the 
lack of data exclusivity.  While these problems cannot all be 
fixed immediately, Turkey needs to begin resolving them.  If 
it can do this, while continuing to make progress on the 
macroeconomic fundamentals, there should be lots of interest 
from foreign investors. 
 
 
8.  (SBU) Babacan acknowledged that FDI inflows were 
"negligible."  The government, he said, specifically the 
Committee for Enhancing the Investment Environment (which he 
chairs), is working with the private sector to change things. 
 The Committee meets regularly to discuss problems and 
propose solutions.  Already it has drafted or partly drafted 
21 pieces of legislation.  Parliament has approved 7 of them, 
including a new FDI law and legislation that streamlines the 
process for establishing a new company.  Babacan recalled 
that, several years ago, he had needed 10 weeks to gain 
Treasury approval for his European joint venture partner to 
transfer capital to Turkey.  Under the new law, the number of 
steps needed to establish a new company had been reduced from 
19 to 3, and the process could be accomplished in just one 
day.  Fortunately, there is a consensus within the government 
on reducing bureaucracy and improving regulation. 
 
 
9.  (SBU) Another big issue, said Babacan, is taxation. 
Because Turkey has a huge informal economy that does not pay 
taxes, the government has had to impose a slew of additional 
taxes to raise revenue.  This has contributed to Turkey 
having the most expensive gas and the 3rd or 4th most 
expensive industrial electricity in Europe.  The GOT is now 
working with the IMF to determine how to shift at least some 
of the informal economy into the formal sector. so it can 
reduce tax rates, further improving the investment 
environment. 
 
 
10.  (SBU) Picking up on Babacan's reference to sound 
regulation, Ambassador stressed the importance of strong 
government backing for Turkey's independent regulatory 
boards.  He reiterated the need for the GOT not only to pass 
new laws, but to take concrete steps to resolve problems 
facing existing investors.  If, he said, the government began 
to address these problems, he would be prepared to travel to 
the U.S. to make the case for investing in Turkey.  At this 
point, however, it would be hard to make that case, given the 
problems affecting so many major U.S. companies. 
EDELMAN