US embassy cable - 04ANKARA3662

UNCLAS ANKARA 003662 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND ADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, PREL, TU 
SUBJECT: IMF, TURKEY EXPECT TO SIGN LOI FOR 8TH REVIEW NEXT 
WEEK 
 
REF: ANKARA 3409 
 
1.  (SBU) IMF ResRep told us June 28 that the 
recently-completed Mission had resolved most outstanding 
issues, although the work was harder and took longer than 
expected. He predicted they would sign the Letter of Intent 
for the 8th Review next week, enabling the IMF Board to 
complete the review before it begins its summer holiday. 
 
2.  (SBU) Brekk said there were two substantive outstanding 
issues when the Mission departed.  First, the GOT needed to 
agree to pass higher oil prices on to consumers, i.e., stop 
compressing the Petroleum Excise Tax to avoid passing on 
higher world prices.  The government on June 29 announced a 
five percent increase in petroleum product prices.  Second, 
the GOT had not been fully living up to its commitment to 
transfer Special Revenues (which in the past were earmarked) 
to the general budget.  The end-June target was to transfer 
TL 1.3 quadrillion ($872 million), but the GOT had only 
transferred TL 600 million ($403 million) as of mid-June. 
After the Mission departed, the authorities transferred 
another TL 600 million, so they are now close to the end-June 
target.  Brekk said the GOT clearly had been trying to take 
advantage of fiscal overperformance to spend more money 
(i.e., use these formly earmarked funds for spending outside 
the budget), but the Fund stopped this. 
 
3.  (SBU) In a June 25 conversation, Treasury U/S Canakci 
agreed the review had been more difficult than expected, in 
large part due to disagreements over the Petroleum Excise Tax 
and a GOT proposal to expand investment incentives.  He added 
that the GOT and Fund had also discussed a GOT legislative 
initiative to cap municipal borrowing (previously limited 
only by Treasury's willingness to provide guarantees for 
external borrowing).  The GOT had proposed capping borrowing 
at 200 percent of a munipality's annual revenue, but -- after 
the Fund weighed in -- agreed to reduce the cap to 100 
percent of annual revenues. 
 
4.  (SBU) Brekk said they would have to plug in revised 
macroeconomic numbers to the LOI, based on GNP and inflation 
figures due to come out June 30.  He predicted that the GOT 
would have to revise up both projected GNP growth and the 
current account deficit, which he acknowledged was becoming a 
concern.  Canakci also acknowledged for the first time that, 
because of the growing current account deficit and large debt 
repayments, a financing gap was likely to emerge in 2005.  He 
reiterated that the GOT had not yet decided whether to seek 
another IMF Stand-by, but said he understood from comments by 
Fund officials that the IMF would be willing to provide more 
lending if requested.  Separately, AK MP Reha Denemec told us 
June 28 that, in economic terms, there was no doubt that 
Turkey needed additional IMF financing, but GOT officials 
were hesitant because of the perceived domestic political 
cost of pursuing that option. 
EDELMAN