US embassy cable - 03ANKARA6422

UNCLAS ANKARA 006422 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, EB/IFD 
TREASURY FOR OASIA - MMILLS AND JLEICTHER 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: IMF CLOSE TO AGREEMENT ON SIXTH REVIEW 
 
 
REF: A. ANKARA 6241 
     B. ANKARA 6342 
 
 
 
 
 
 
 1. (SBU) Summary: IMF Resident Representative Odd Per Brekk 
told econoff the IMF mission is close to agreement with the 
GOT on a Letter of Intent.  The budget issues have been 
worked out and Brekk believes the Prime Minister has accepted 
a version of the direct tax reform the Fund can live with. 
The GOT will need to take a series of actions between now and 
when the Sixth Review goes to the IMF board, most likely in 
early November.  End Summary 
 
 
2. (SBU) In a brief telephone conversation October 14, IMF 
ResRep Odd Per Brekk told econoff the IMF mission believes it 
is close to a deal with the GOT.  Assuming last-minute 
details can be wrapped up this evening, there may be an 
announcement as early as the morning of October 15. 
 
 
3. (SBU) Brekk did not provide a detailed description of each 
issue but, in sum: 
 
 
--Budget: The Council of Ministers approved a budget October 
13 that Brekk said was in line with what had earlier been 
worked out between Fund staff.  Brekk said the staff had held 
a series of long meetings with Ministers Unakitan and Babacan 
in recent days.  Though IMF staff had yet to see the final 
version approved by the Council, they understand it was what 
they had earlier approved. 
 
 
--Direct Tax Reform:  Babacan and Unakitan reportedly 
convinced Prime Minister Erdogan to curtail some of the 
regional tax incentives the PM had publicly advocated to a 
point that the IMF could accept.  On Economic Free  Zones, 
the law will eliminate the exemption on personal income tax 
for employees of newly-established companies and phase out 
the personal tax exemption for employees of 
already-established companies. 
 
 
--SEE Staff Reduction:  The GOT and Fund Staff, with World 
Bank concurrence, have now agreed to increase the incentive 
for SEE employees to retire before the end of 2003 and to 
extend the coverage in the World Bank project for laid-off 
employees of privatized companies to include employees of 
not-yet privatized SEE's.  Separately, though the IMF did not 
agree to change its definition of redundant employees, GOT 
agreement to abolish the positions at individual state 
companies' that reduced staffing over their company-specific 
targets provides some encouragement that the GOT is making an 
effort to reduce SEE staffing. 
 
 
--Banking issues: The only outstanding issue is a detailed 
strategy to deal with Pamuk Bank.  Pamuk Bank is losing money 
and the GOT urgently needs to make a decision how to deal 
with it, according to Brekk.  To plug the hole will cost 
Treasury approximately USD 1.1 billion, which Brekk believes 
was the reason for GOT slowness in coming to a decision. 
Brekk believes the GOT now understands the need for a 
detailed plan before the Sixth Review comes to a vote in the 
IMF Board. 
 
 
4. (SBU) In addition to the Pamuk Bank issue, Brekk said 
there are a number of actions the GOT will need to take 
before the date of the IMF Board vote on the Sixth Review: 
 
 
--BRSA Strengthening Legislation: The law will need to be 
passed by Parliament. 
 
 
--Public Financial Management and Control Law: Also needs 
parliamentary passage. 
 
 
--Direct Tax Reform: Approval by Council of Ministers. 
 
 
5. (SBU) Finally, Brekk said there were a number of 
(unspecified) implementation issues.  Brekk now expects the 
Board vote to take place in early November rather than in 
October. 
 
 
 
 
 
 
 
 
EDELMAN 
 
 
EDELMAN