US embassy cable - 03ANKARA7140

UNCLAS SECTION 01 OF 02 ANKARA 007140 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PREL, PGOV, TU 
SUBJECT: MEETINGS WITH TREASURY UNDERSECRETARY AND CENTRAL 
BANK GOVERNOR 
 
 
REF: A. ANKARA 6886 
     B. ANKARA 7096 
 
 
 1. (Sbu) Treasury U/S Canakci told Econoffs that the IMF 
Sixth Review is unlikely to come to a Board vote before 
mid-December, since the Turkish parliament will need some 
time to pass the required legislation.  Canakci also 
confirmed that the GOT will probably have to get 
parliamentary approval for the U.S. Financial Agreement, if 
the GOT decides to move forward on it. Separately, the 
Central Bank Governor defended the Central Bank's foreign 
exchange regime.  He said the Central Bank is implicitly 
targeting inflation, but will not move to formal inflation 
targeting until it conditions are right. End Summary. 
 
 
Meeting with Treasury U/S Canakci 
--------------------------------- 
 
 
2. (Sbu) Econoffs met with Treasury Undersecretary Ibrahim 
Canakci November 14.  Regarding the U.S. Financial Agreement 
(FA), Treasury legal experts have still not provided their 
formal opinion.  Informally, however, Canakci said they are 
coming to the conclusion that the FA would have to go to 
Parliament for approval--a conclusion shared by MFA lawyers 
and the Director General of the Prime Ministry.  Econcouns 
summarized the Ambassador's most recent conversation with MFA 
U/S Ziyal on the political conditionality (ref b).  Canakci 
wryly noted that the political conditions were always public 
information on the U.S. Congress' web site and that no one 
ever raised this issue during the negotiations. 
 
 
3. (Sbu) Canakci explained the current status of the 
legislation strengthening the effectiveness of the BRSA. 
According to Canakci, the GOT and the IMF were in agreement 
on the two articles in the law which are required for the 
Sixth Review.  These articles establish a special chamber in 
the courts to handle BRSA-related cases and put time limits 
on appeals of BRSA decisions.  The recent controversy arises 
from other articles in the law, about which the IMF and the 
Bankers' Association have concerns.  According to Canakci, 
the controversy stems from the transfer of asset collection 
powers from the BRSA to the Finance Ministry, and from the 
extension of penalties to a wide range of people.  Canakci 
said that if the GOT cannot reach an understanding with the 
IMF, the two articles needed for the Sixth Review may be made 
into a separate law and passed without waiting for resolution 
of the other issues.  The legislation is currently in the 
Justice Committee of Parliament. 
 
 
4. (Sbu) Canakci said the Public Financial Management and 
Control Law  was under discussion in the Budget committee and 
would most likely be considered by the General Assembly after 
the Bayram holiday.  The budget was also moving out of 
commmittee to the General Assembly, most likely the week of 
November 17.  With all this IMF-required legislative work 
still ongoing, Canakci predicted that the IMF Board would not 
consider Turkey's Sixth Review before mid-December. 
 
 
5. (Sbu) On the macroeconomic targets, Canakci remains 
confident that Turkey will have no difficulty meeting the 6.5 
percent primary surplus target for 2003, as well as the 5 
percent GDP growth target and the 20 percent inflation 
target. 
 
 
6. (Sbu) In contrast with the good macro performance, 
Econcouns expressed concern about the lack of momentum on 
structural reforms, noting the slowness of the privatization 
program and problems with the investment climate that will be 
an important theme at the upcoming Economic Partnership 
Commission meetings. Econcouns also commented on the need to 
maintain a strong, independent BRSA.  In reply, Canakci only 
noted the GOT's desire to make progress in these areas and 
cited the GOT's intention to re-engage with the World Bank on 
structural reforms. On privatization, Canakci claimed the GOT 
gave a higher priority to developing the private sector than 
to maximizing the receipts from privatizations.  On the 
failed Tekel tobacco tender, Canakci pointed out that the 
Finance Minister had made a mistake by raising expectations 
beforehand, since it is always better to have a positive 
surprise. 
 
 
Meeting with Central Bank Governor Serdengecti 
--------------------------------------------- - 
 
 
7. (Sbu) In a meeting November 13, Central Bank Governor 
Serdengecti worried about developments at the BRSA, saying 
that if the BRSA has a boss who follows the government, then 
"we have a problem."  Serdengecti also referred to problems 
at the BRSA unrelated to Akcakoca's departure: staff that 
came from Treasury were ultra-conservative and the sworn 
auditors were sometimes suspected of corruption. 
 
 
8. (Sbu) Serdengecti predicted that November price inflation 
might be above markets' expectations but that the 20 percent 
year-end inflation target would still be met.  In early 2004, 
the inflation numbers will benefit from a base effect; 
however, the Governor thought that predictions of 
single-digit inflation by mid-year were too optimistic. 
Given the lag in monetary policy, the Central Bank is 
currently focused on 2004. 
 
 
9. (Sbu) Serdengecti characterized the Central Bank's current 
approach as "implicit inflation targeting," a concept he 
attributed to former IMF Deputy Managing Director Stanley 
Fischer.  The Governor cautioned that the Bank does not want 
to move to formal inflation targeting until it is certain it 
will work.  He described the necessary pre-conditions as: 1) 
a more certain fiscal situation with lower interest rates; 
and 2) labor union wage restraint including unions tying wage 
demands to expected--not historical--inflation rates. 
 
 
10. (Sbu) In reply to concerns raised by former Economy 
Minister Kemal Dervis and others regarding the current 
account deficit, Serdengecti, with characteristic bluntness, 
said that Dervis never understood the floating exchange rate 
regime.  The Governor emphasized that the Bank was targeting 
inflation--not the exchange rate--and would not use its 
foreign exchange reserves to stabilize the currency because 
it needs the reserves to service the GOT's external debt and 
to manage the Central Bank's own costly foreign 
exchange-denominated liabilities.  In reply to those who 
worry about the overvaluation of the Lira, he pointed out 
that the currency would have appreciated even more had the 
Central Bank not bought USD 10 billion over 6 months.  The 
Bank had stopped buying foreign exchange in October because 
market participants were confused and had begun to speculate 
against the Lira.  But the Bank was not targeting a 
particular level for the currency. 
 
 
11. (Sbu) The Governor expressed some concerns about the way 
in which the GOT was handling the planned elimination of six 
zeroes in the currency.  He emphasized that much preparation 
was needed, and that the draft legislation was already late. 
In his view, the currency change should take place at the 
beginning of a calendar year. 
 
 
12. (Sbu) Serdengecti agreed with Econcouns on the importance 
of reforms to attract more foreign direct investment.  He 
recounted how, when questioned at public events about the 
desirability of foreign investment, the Governor responded: 
"Do you want 3 percent growth or 6 percent?"  Serdengecti 
said the Turkish savings rate was too low to achieve strong 
growth without foreign investment.  He also suggested that 
the Turkish Treasury should be more vocal on FDI issues. 
 
 
 
 
DEUTSCH