US embassy cable - 03ANKARA6162

UNCLAS ANKARA 006162 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - LOEVINGER, MILLS AND LEICHTER 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: IMF MISSION BEGINS TALKS 
 
 
REF: ANKARA 6141 
 
 
1.  (SBU) IMF ResRep briefed us late October 1 on the 
mission's first few days of talks in Ankara.  Although the 
talks are going well, he cautioned that there is still much 
work to do, and it is too early to say whether the mission 
will be able to wrap things up during this visit, which ends 
October 10.  He promised a further read-out on October 3, but 
warned that the team probably would not be able to make a 
meaningful assessment on progress until early next week. 
 
 
2.  (SBU) Initial talks have focused on direct tax reform, 
the Public Financial Management and Control bill, and issues 
related to the banking sector, particularly Imar Bank. 
 
 
-- On direct tax reform, the mission is trying to convert the 
recommendations of a Fund technical advisory team into draft 
legislation, but continues to run into political resistance. 
Specifically, they still have to work around Prime Minister 
Erdogan's public commitment to maintain or even add to tax 
incentives in poor regions, as well as State Minister 
Tuzmen's strong opposition to phasing out tax breaks in 
economic free zones. 
 
 
-- The IMF, World Bank, and the GOT are close to agreement on 
the Public Financial Management and Control bill, but it 
still needs to be finalized, sent to Parliament, and then 
approved by Parliament (which went back into session today). 
 
 
-- Although there is no formal conditionality on this 
(because it was an unanticipated development), the Fund wants 
the GOT to take measures to address concerns arising from the 
Imar Bank scandal.  Specifically, the Turks need to determine 
how they are going to cover depositors, manage the resulting 
increase in public debt, and deal with the blow to the 
credbility of both the BRSA and the Capital Markets Board. 
ResRep said the GOT has good ideas on these issues, but will 
need to see them put into practice by the time of the Board 
review. 
 
 
3.  (SBU) ResRep said the mission would discuss these issues 
late today with State Minister Babacan, who is expected to 
take proposals to Prime Minister Erdogan tomorrow.  Fund 
staff hopes to have feedback by October 3.  Meanwhile, they 
continue to work on other key issues, including: 
 
 
-- SEE employment:  The GOT definitely will miss the 
end-September target of reducing redundant state enterprise 
workers by 19,000; however, ResRep said Turkish officials are 
working on measures that could enable them to accelerate the 
process. 
 
 
-- Legislation to strengthen BRSA's hand in court cases 
involving taken-over banks:  The process leading to 
submission of legislation to Parliament has gone a bit 
astray, as Deputy Prime Minister Sener has referred it to 
Justice Minister Cicek for study and comment.  ResRep said 
there "could be be problems here that we hadn't anticipated." 
 
 
-- Fiscal issues:  ResRep expressed optimism that any budget 
gap for this year would be small -- less than 0.5 percent of 
GNP -- and easily managed.  The bigger question is the 2004 
budget, where the GOT will have to introduce new meaures to 
take the place of one-off measures implemented to meet this 
year's primary surplus target.  Although Turkish technocrats 
say they expect to come to agreement with the Fund on the 
budget by the October 10 mission end-date, ResRep noted the 
possibility that the political leadership would choose to 
wait until after the October 12 AK party meeting to finalize 
the budget (which must be presented to Parliament by October 
17). 
 
 
4.  (SBU) Comment:  We will meet senior Treasury and State 
Planning Organization officials over the next two days to get 
the GOT take on developments, and will touch base with Fund 
staff again October 3 before sending in our assessment of 
progress. 
EDELMAN