US embassy cable - 03ANKARA5951

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 005951 
 
SIPDIS 
 
 
TREASURY FOR OASIA - MMILLS AND JLEICHTER 
STATE FOR E, EB/IFD/OMA, AND EUR/SCE 
NSC FOR MCKIBBEN 
DUBAI PASS TREASURY - DLOEVINGER 
 
 
E.O. 12958: DECL: 09/15/2008 
TAGS: EFIN, PGOV, PREL, TU 
SUBJECT: POST THOUGHTS ON DISBURSEMENT TIMING, MESSAGE TO 
TURKS 
 
 
1. (U) Classified by Deputy Chief of Mission Robert Deutsch 
for reasons 1.5 (b) and (d). 
 
 
2. (C) Summary:  Ankara-based IFI officials have expressed 
concern that the timing of the U.S. disbursement of its 
financial assistance could create moral hazard by removing 
market pressure for implementation of reforms, just as the 
work of the Sixth Review is peaking.  Although we would not 
say the GOT is "off track," it still has much work to do to 
comply with the Sixth Review requirements. Particularly 
because our actions on the first disbursement will set a 
precedent, as we proceed to sign the Financial Agreement, we 
should reiterate to the GOT our standards of evaluation of 
"strong economic policies," and make clear that our 
disbursements will require us to determine that the GOT is 
making appropriate, continuous progress on the reform 
program.  Doing so will discourage a premature GOT 
disbursement request, and also enable us to reject any 
suggestion that we are moving the goalposts. End summary. 
 
 
IFI (and Post) Concerns about Early Disbursement: 
--------------------------------------------- --- 
 
 
3. (C) Both World Bank and IMF officials based in Ankara have 
expressed concern that the first disbursement of U.S. 
financial assistance could undermine pressure for reforms, if 
it occurs when the IFIs are in the middle of negotiations 
with the GOT on reform implementation.   A U.S. disbursement 
could create a moral hazard problem by overwhelming any 
market concern about failure to reform, thus preventing 
markets from sending the right message. 
 
 
4. (C) Despite assurances the GOT policymakers finally 
understand the need to proceed with implementation, GOT 
behavior during the period since completion of the IMF Fifth 
Review has been no different than earlier post-review 
periods. Despite all the positive rhetoric, they have yet to 
demonstrate that they are going to move with any greater 
alacrity and enthusiasm to complete the Sixth Review than 
they did for the Fifth.  The GOT track record remains one of 
pushing through reforms in a rush just in time to get delayed 
IMF Board approval of a review, and only when failure to do 
so would have significant repercussions in the market.   The 
IMF's Sixth Review mission arrives in Turkey September 25 and 
is expected to stay through October 11.   In the first half 
of October, we expect the GOT and the IMF to be in the thick 
of negotiations for implementation and corrective action. 
 
 
Lots to Do for the Sixth Review: 
-------------------------------- 
 
 
5.  (C) Since the Fifth Review, the GOT does not appear to 
have taken significant additional action on the reform 
program, although this can at least partly be attributed to 
the parliamentary recess.  In a meeting with Econoffs 
September 18, IMF ResRep Odd Per Brekk was careful not to say 
the GOT is off track, but outlined the considerable work 
still to be done for the Sixth Review: 
 
 
--SEE's: A Treasury official admitted to Econoffs that the 
GOT had reduced the number of redundant SEE employees by only 
11,000, far from the 19,000 end-September target.  The IMF 
ResRep did not feel the record was all negative, however, 
since the program's strategy seems to be working, albeit more 
slowly than anticipated. The key will be whether the 
government has the political will to lean on the SEE managers 
to further reduce staff. 
 
 
--Public Financial Management and Control Law: The ResRep was 
optimistic it would be passed by Parliament, though, of 
course, he could not say for sure whether it would be passed 
by the end-October target date. 
 
 
--Direct Tax Reform: It remains controversial and 
politicized, with considerable GOT resistance--up to the 
Prime Minister--to eliminating all the regional tax 
incentives.  Though the Sixth Review will not require passage 
of the Direct Tax Reform, it will require GOT agreement with 
the Fund on the specifics. 
 
 
--Legislation to strengthen the BRSA's hand in dealing with 
court cases involving problem Banks: It has been prepared but 
parliamentary passage will also be needed for the Sixth 
Review. Comment: Given the Imar Bank controversy, there may 
be some debate.  End comment. 
 
 
--Privatization:  The Sixth Review requirement of approval of 
a plan to privatize Turk Telekom appears to be on track, 
according to Brekk, though the Council of Ministers has yet 
to formally approve the plan.  Though the indicative 
privatization proceeds targets will be missed, the 
Privatization Authority seems to be moving ahead on the 
Tekel, Tupras, and Petkim privatizations. (Post will be 
reporting more on privatization in the coming days). 
 
 
--Growth and inflation targets: Brekk said current trends 
suggest Turkey will reach the year-end target of 5 percent 
real GDP growth and at least come very close to the 20 
percent inflation target.  Lira interest rates are in line 
with Fund projections. 
 
 
--Fiscal target: Brekk and his deputy, Christoph Klingen, 
insisted they still did not have clarity on January-August 
fiscal performance.  Klingen said that he and the IMF's 
fiscal economist--due in Ankara in a few days--need to go 
over the numbers in detail with Finance Ministry officials 
before making any firm judgments.  Brekk admitted, however, 
that the GOT probably missed the end-August primary surplus 
target by a small amount, though the GOT says it remains 
committed to the 6.5 percent year-end target.  Brekk also 
felt that, if the GOT missed that target, it would only be by 
a small amount, not the 1.5 to 2 percent of GNP suggested by 
some analysts. 
 
 
U.S. Message: 
------------ 
 
 
6.  (C) Today's daily newspaper "Milliyet" carries Babacan's 
warning that the U.S. and Turkey might not sign the FA in 
Dubai the week of September 22, saying "we cannot say 
everything is on track" in reference to Congressional 
requirements of conditionality.  This comment is in keeping 
with Babacan statements earlier in the year that the U.S. 
might pull surprises or impose new conditions. 
 
 
7.  (C) We have been clear all along that we were going to 
condition this money on strong implementation of reform, and 
we neeed to remind Babacan that this has been our position 
all along, and continues to be our position.  This should be 
our strong message to him in upcoming meetings.  As 
Washington knows, over the next 18 months our money will 
exceed by far any net cash flow from the IMF.  The first 
disbursement is an opportunity to set a positive precedent 
that a) we aren't playing games or coming up with new 
conditions, but b) fully intend to use this money to 
encourage sound policies and reform.  If we are going to 
require something approximating completion of the Sixth 
Review requirements before disbursement, which we believe is 
the right approach, it is critical that we let the GOT know 
this now, so as to avoid a premature GOT disbursement request 
or any suggestion that we are moving the goal posts. 
EDELMAN