US embassy cable - 03ANKARA7417

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 007417 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD, AND EUR/SE 
TREASURY FOR OASIA - MMILLS AND JLEICHTER 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: DECL: 12/02/2008 
TAGS: EFIN, ECON, EAGR, ENRG, ECPS, TU 
SUBJECT: MEETING WITH WORLD BANK ECONOMIST 
 
 Classified for reasons 1.5 (b) and (d) by Economic Counselor 
Scot Marciel. 
 
 
1. (C) Summary: Resident World Bank economist James Parks 
told econoffs that the GOT has yet to meaningfully re-engage 
with the Bank in several sectors, though in others there is a 
continuing dialogue. Parks raised the question of how to 
avoid a sharp fall in the lira, given the likely size of next 
year's current account deficit, particularly if neither the 
U.S. nor World Bank facilities disburse.  Parks noted that 
the GOT's tendency to muddle through on reforms often results 
in Turkey getting neither  populist political benefits nor 
the economic benefits of decisive reforms. End Summary. 
 
 
2004 Current Account Deficit: 
---------------------------- 
 
 
2. (C) Econoffs met November 21 with World Bank economist 
James Parks, who has been covering Turkey for 5 years at the 
Bank mission here. Parks expressed concern that the large 
2004 current account deficit could lead to a sharp fall in 
the lira, particularly if Turkey neither avails itself of the 
U.S. Financial Assistance (FA) nor implements the reforms 
needed to obtain additional World Bank disbursements.  Parks 
does not believe the markets have priced in such a scenario. 
Parks sees market participants as still viewing the holding 
of dollars as a losing bet, and are therefore perpetually in 
search of high-yielding TL assets.  In this situation, there 
is a danger of a sharp reversal in the markets next year. 
Note: Parks question has been raised by some private 
analysts, but Parks comments contrasts with IMF and Central 
Bank officials who have downplayed such concerns to econoffs. 
End Note. 
 
 
3. (C) Parks does not believe that Economy Minister Babacan 
and other senior GOT officials see the connection between 
re-engagement with the World Bank to get disbursements and 
the need for external funding to finance the CA deficit. 
Parks is of the opinion that Babacan is too focused on 
short-term tactics in the domestic debt market, and not 
enough on inspiring international confidence that attracts 
long-term funding such as World Bank credits. 
 
 
Bank Waiting on Promised GOT Re-engagement: 
------------------------------------------ 
 
 
4. (C) Though Minister Babacan promised World Bank President 
Wolfensohn in Dubai that the GOT would re-engage with the 
World Bank on a series of stalled programs, the Bank is 
waiting to see signs of such re-engagement.  Parks described 
varied degrees of engagement with the Bank, ranging from 
close consultation in sectors like agriculture, to zero a 
near-total absence of dialogue on a decentralization 
proposal. 
 
 
 
 
Agriculture: 
----------- 
 
 
5. (SBU) The Bank has been quite active in the agriculture 
sector and believes it has broadly succeeded in moving the 
GOT from inefficient and expensive forms of ag subsidies to 
direct income support payments to farmers.  The Bank had been 
proposing direct income support legislation, but the GOT 
recently decided it wanted to fold this into a broader 
agriculture law.  In the process, the GOT proposed what the 
Bank considered a step backwards: a deficiency payment to 
cotton farmers.  Rather than try to kill the subsidy 
altogether, the Bank is trying to convince the GOT to put its 
money into less distortionary and more effective uses, such 
as investing in additional irrigation.  Likewise, the Bank 
has been trying to encourage hazelnut farmers to get into 
other crops.  Though the Bank and Turkish officials do not 
always agree on ag issues, at least the GOT engages with Bank 
experts and is willing to listen. 
 
 
Privatization: 
------------- 
 
 
6. (C) To the extent the privatization process ever moves 
forward in Turkey, it moves in fits and starts, according to 
Parks.  Things moved forward in the first half of 2000, then 
nothing until this year.  Parks thinks the current 
government, particularly Finance Minister Unakitan, believes 
in privatization, and the GOT did privatize some small 
companies earlier in the year.  Parks viewed the tobacco law, 
passed to facilitate the privatization of the tobacco 
operations of Tekel, as a step forward in that it eliminated 
tobacco farmer support purchases.  Despite this reform in the 
law, the GOT pressured Tekel to buy tobacco in Eastern 
Turkey.  Potential buyers in the privatization process were 
not clear as whether they would be pressured as well, 
consequently they had to discount their bids accordingly. 
Parks cited this as an example of how the GOT's 
muddle-through approach results in the worst of both worlds: 
the GOT neither gets the populist political benefit of 
support to the farmers, not the economic benefits of 
privatization at a good price. 
 
 
Energy: 
------ 
 
 
7. (C) Parks made a parallel with the energy sector, in which 
he saw the GOT as continuing to muddle through without a 
clear announcement of a policy framework.  Instead, the GOT 
is trying to sell assets one by one.  The Bank has been 
urging the GOT not to sell generation assets until a sectoral 
framework exists. 
 
 
Telecoms: 
-------- 
 
 
8. (C) Though much work remains to be done, Parks views 
telecoms as one of the better sectors in terms of GOT 
commitment to reform.  An earlier telecom law established a 
regulatory body and set a January 1, 2004 date for 
liberalization of the sector.  The liberalization will not 
actually happen by that date, however, because the regulatory 
framework is not fully in place, according to Parks. 
Although the cabinet recently approved a privatization plan 
for Turk Telekom as a condition of the IMF's Sixth Review, 
new legislation is needed to allow the privatization to go 
forward.  This will take time, effectively delaying 
liberatization of the sector.  Parks cited this as an example 
of the GOT's difficulty in tackling multiple issues 
simultaneously. 
 
 
BRSA and SDIF: 
------------- 
 
 
9. (C) Parks saw little progress on banking sector reforms. 
The bank regulatory body (BRSA) has been badly shaken by the 
removal of its senior management.  Parks believes the GOT has 
figured out that the SDIF (the deposit insurance fund) is 
more important to control than the BRSA itself, and is 
therefore proposing to have the Council of Ministers approve 
all asset sales.  Comment: The SDIF's asset sales program has 
been painfully slow. If the GOT Council of Ministers has to 
approve these sales, it is likely to be even slower. 
Moreover, GOT control of the SDIF could lead to a return to 
political influence in decisions of bank seizures and asset 
sales. End Comment. Parks' analysis is that the GOT has a 
political problem with the clean-up of the banking sector. 
Whereas the USD 30 billion that the Turkish state has put 
into recapitalizing the banking sector was injected under the 
previous government, the GOT now is confronted with the 
politically unattractive necessity of injecting new money to 
cover Imar Bank and Pamuk Bank losses.  Hence the "political 
show" of blaming former BRSA Chairman Akcakoca, and the 
slowness in passing the legislation authorizing the financing 
plan for the Imar Bank payout to depositors.  Parks does not 
believe the IMF is engaging forcefully enough with the GOT on 
these issues. 
 
 
Public Administration: 
--------------------- 
 
 
10. (C) Parks noted favorably Minister Unakitan's commitment 
to pass legislation in December closing extra-budgetary 
accounts.  Though Parks is quite bullish on the Public 
Financial Management and Control law, in other areas of 
Public Administration reform, he said the GOT has not engaged 
with the World Bank.  For example, the Prime Ministry is 
working on legislation governing independent bodies and has 
claimed it would be in conformity with the BRSA law. 
However, according to Parks, it is not and the Bank is 
objecting.  Worse still, the GOT is working on legislation 
that would greatly decentralize control over many state 
functions, devolving power to municipalities.  Parks said 
there would be a five-fold increase in funding to 
municipalities, yet the GOT is not working with the IFI's on 
this, except to say they will discuss it when it gets to the 
implementation stage.  Given the Bank's desire to encourage 
the GOT to re-engage, and the narrower goal of seeing the 
Public Financial Management and Control law passed, the Bank 
has not yet pressed the GOT on the decentralization 
legislation. 
 
 
EDELMAN