US embassy cable - 04ANKARA4127

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 004127 
 
SIPDIS 
 
STATE FOR E, EUR, EB 
TREASURY FOR OASIA - LOEVINGER, MILLS, ADKINS 
NSC FOR BRYZA, MCKIBBEN 
 
E.O. 12958: DECL: 07/23/2009 
TAGS: EFIN, ECON, PREL, TU 
SUBJECT: DAS KENNEDY HIGHLIGHTS REFORM AT TURKISH TREASURY 
 
 
Classified By: Robert Deutsch, Charge d'Affaires, ai.  Reasons 1.4 (b,g 
) 
 
1.  (C)  Summary.  EUR DAS Kennedy highlighted to the Turkish 
Treasury chief the importance of Turkey keeping its economic 
recovery on track by continuing and intensifying reforms and 
attracting long-term investment.  Although the GOT has not 
yet decided on what form its relationship with the IMF will 
take when the current stand-by program expires early next 
year, the government is discussing the subject with the IMF 
and is simultaneously developing its own new three-year 
economic framework program.  The Treasury expects 2004 GDP 
growth to reach as high as 6%.  End Summary. 
 
2.  (C)  Meeting with EUR DAS Laura Kennedy on July 20, 
Turkish Treasury Under Secretary Ibrahim Canakci said that 
Turkey's current stand-by agreement with the IMF had been 
"very successful" in meeting its goals of sustained growth, 
inflation reduction, debt reduction, structural reform in the 
public and banking sectors, and investment climate 
improvements.  He said he expected 2004 GDP growth to exceed 
the 5% IMF target and perhaps reach 6%.  Thanks to tight 
fiscal policy, the debt to GDP ratio, which peaked at 91% in 
2001, had declined to 71% at the end of 2003 and should fall 
to 55% by the end of 2007. 
 
3.  (C)  On the structural side, numerous reforms had 
enhanced discipline, transparency, and accountability in the 
public sector.  These included social security reform, 
elimination of agricultural supports, rationalization of 
public sector financial management -- including 
implementation of three-year budgeting, elimination of 56,000 
positions in public enterprises and closing 2,000 
unproductive government investment schemes.  In the banking 
sector, EU regulation and supervision standards had been 
established and an independent regulator created.  Three 
state banks had been closed and two were in the process of 
being privatized.  Private banks had been restructured, with 
over 20 "intervened" by the deposit insurance fund since 1997. 
 
4.  (C)  Canakci described efforts to improve the foreign 
investment climate.  A 2003 law ended prior approval and 
minimum capital requirements for foreign investments.  Red 
tape had been reduced, cutting the number of steps to 
establish a business from 19 to 3.  An investment promotion 
agency and a National Investment Council chaired by the Prime 
Minister, which held its first meeting in March, had been 
created.  (Note:  The Council has yet to produce concrete 
reforms.)  Canakci noted that there had been an upsurge in 
the number of new companies established, although higher FDI 
inflows were not yet visible in the macro numbers.  He also 
acknowledged that Turkey receives far less FDI than similar 
economies of its size and potential.  This "makes us hopeful" 
of increased inflows for the future, Canakci said. 
 
5.  (C)  Asked by Kennedy about Turkey's relationship with 
the IMF once the current stand-by program expires in February 
2005, Canakci said there were three options:  1) post-program 
monitoring that would not include new IMF financing, 2) a 
"precautionary" agreement that would provide financing in the 
case of need, and 3) a new stand-by.  He said that none of 
these could be ruled out and that Turkey had started 
discussing a follow-on relationship with the Fund.  At the 
same time, he said that the GOT is developing its own 
three-year economic framework that would include government 
spending, revenue, debt, inflation and other macroeconomic 
targets.  This program would be announced in the coming 
months. 
 
6.  (C)  Kennedy concluded the meeting by praising the 
efforts Turkey has made to put its economy on a sound 
footing.  She understood the difficulties and the sacrifices 
had been made and were being made to reach this objective. 
Nonetheless, Kennedy said it was vitally important that the 
reform policies described by Canakci continue and intensify 
as necessary.  She noted United States support, including 
making available $8.5 billion in credits, which remained at 
Turkey's disposal. 
 
7.  (C)  Comment:  In highlighting Turkey's achievements, 
Canakci glided over the large amount of difficult work that 
Turkey still needs to do.  DAS Kennedy's call delivered a 
strong signal of U.S. interest in and support of Turkey's 
continuing economic reform process.  The achievements Canakci 
described are indeed impressive and real.  However, Turkey 
has far more to do -- particularly in reducing its government 
debt and reforming its government, financial, corporate, 
legal and financial sectors -- before it will be able to 
attract the large amounts of foreign and domestic investment 
it needs to achieve sustained growth and improved living 
standards. 
DEUTSCH