US embassy cable - 03ANKARA6241

UNCLAS SECTION 01 OF 02 ANKARA 006241 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR MCKIBBEN AND BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EFIN, PREL, TU 
SUBJECT: OCTOBER 3 UPDATE ON IMF MISSION 
 
REF: A. (A) ANKARA 6199 
     B. (B) ANKARA 6141 
 
 
1.  (SBU) Summary:  IMF ResRep told us late today that 
progress in reaching agreement on measures for the 6th review 
had been a bit slower than they had planned, but he remained 
hopeful the mission could wrap things up by the end of next 
week.  The main issues remain winning GOT political-level 
support for a compromise approach on direct tax reform, and 
sorting out the details of the 2004 budget.  He and State 
Planning Organization U/S Tiktik said intensive technical 
level discussions on the budget would continue through the 
weekend, with the focus on how much the GOT should rely on 
continuation of so-called "one-off" measures to meet its 2004 
primary surplus target.  End Summary. 
 
 
2.  (SBU) IMF ResRep told us late today that talks with the 
GOT had progressed more slowly than staff had planned.  The 
main delay occurred yesterday, when an important internal GOT 
meeting with Prime Minister Erdogan to discuss proposed 
measures on direct tax reform (and a few lesser issues) was 
cancelled due to the PM's heavy schedule.  Discussions on the 
2004 budget had also gone slowly until last night, when a 
long, intensive meeting "got things going." 
 
 
3.  (SBU) ResRep provided a quick update on the key issues: 
 
 
-- Public Sector Management and Control bill:  Fund staff and 
the GOT have agreed on a text, which the GOT was to submit to 
Parliament today. 
 
 
-- Legislation to strengthen BRSA's hand:  Deputy PM Sahin 
told the Fund mission that Parliamentary passage of this bill 
would be "no problem.'  Fund staff is unhappy that this 
legislation, drafted months ago, apparently fell through the 
cracks, and is waiting to see how quickly this proceeds now. 
Parliamentary passage by end-October is a performance 
criteria for the 6th review. 
 
 
-- Redundant SEE workers:  Turkey missed the end-September 
target by a wide margin, but IMF staff deems credible the 
GOT's proposal to accelerate the process by offering 
extra-large severance packages (10-30 percent more than 
normal packages) to workers who agree to retire by year-end. 
Deputy PM Sahin told Fund staff today that the government 
should be able to issue a decree authorizing this by October 
15.  Fund staff is less moved by the GOT's argument that any 
reductions in excess of company=-specific targets (ref a) 
should count toward the target; ResRep pointed out that the 
World Bank's original number of redundant SEE workers had 
already been "watered down" significantly, so Fund staff was 
not inclined to be too generous in flexible how the GOT 
reached the target.  On the other hand, given the generally 
positive economic trends, it would be hard for the Fund to 
delay the review -- and perhaps rock the markets -- because 
the GOT had not fired enough workers. 
 
 
-- Direct Tax Reform: The Fund's intent was to phase out tax 
incentives, both in economic free zones and elsewhere. 
Instead, PM Erdogan had publicly committed to offer 
additional tax incentives in poor provinces, and State 
Minister Tuzman was strongly opposing any reduction of 
incentives in free zones.  Fund staff has reached tentative 
agreement with GOT technocrats on a compromise approach on 
tax incentives in the poor regions; the idea is to offer an 
approach that is "more refined" than the original GOT 
proposal.  ResRep said that, given the lack of economic 
activity and tax receipts in these regions, the Fund was not 
concerned too much about direct tax losses resulting from 
incentives.  Rather, staff is deeply suspicious that the GOT 
will not be able to monitor and control the incentives scheme 
to prevent companies from outside of the incentive areas from 
evading taxes.  On free zones, the Fund wants to phase out 
some tax benefits (i.e. corporate and personal income tax 
exemptions) for existing investors, and eliminate those 
"unnecessary" benefits completely for new investors.  On both 
tax incentives for poor regions and free zones, GOT 
technocrats need to convince Prime Minister Erdogan and, to a 
lesser extent, State Minister Tuzmen to go along with 
compromise approaches.  (SPO U/S Tiktik said the PM was 
insisting on tax incentives for the 36 provinces with per 
capita income under $1500, and also wanted to offer them 
subsidized energy and corporate tax exemptions.  He noted 
that private sector proponents of these incentives were 
"determined and persuasive.") 
-- Budget:  Tiktik said there should be no problem reaching 
this year's primary surplus target of 6.5 percent of GNP.  He 
and ResRep agreed the more difficult task will be the 2004 
budget.  Tiktik, like Treasury U/S Canakci (ref a), argued 
that the GOT would easily be able to continue or replicate a 
number of the "one-off" measures taken this year, reducing 
the size of the problem in 2004.  For example, payments from 
the 2003 "tax amnesty" will continue into 2004, and the GOT 
can continue the additional Special Consumption Tax and other 
measures.  He added that budget transfers to the social 
security funds had declined in the aftermath of the social 
security arrears amnesty, and the GOT expected that trend to 
continue.  ResRep said the Fund was wary of excessive 
reliance on these one-off measures, and wants to see more 
sustainable measures to reach the 6.5 primary surplus target 
next year.  He cautioned, however, that intensive budget 
discussions had just begun last night (and would continue 
through the weekend), so Fund staff would not be able to 
provide a fuller assessment of the budget situation until 
early next week. 
 
 
 
 
EDELMAN