US embassy cable - 04ANKARA5835

UNCLAS SECTION 01 OF 02 ANKARA 005835 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EUR/SE, EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
NSC FOR MBRYZA AND TMCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: TURKEY/IMF: PROGRESS ON BUDGET, OTHER ISSUES REMAIN 
 
REF: ANKARA 5637 
 
1. (Sbu) Summary: In an important sign of progress in 
discussions of a new Standby program, the GOT has publicly 
agreed to a 6.5% primary surplus target for 2005.  Local IMF 
staff privately confirm that the GOT's primary surplus target 
accords with the IMF definition and that the GOT can now move 
forward with a budget the broad outlines of which meet IMF 
approval.  While the highest profile issue seems to have been 
satisfactorily addressed, myriad other issues remain to be 
worked out before agreement is reached on a letter of intent 
for a new Standby, including 2006-7 fiscal targets, progress 
on the banking law, and specific tax measures.  End Summary. 
 
Surprise Concession on the 2005 Primary Surplus: 
--------------------------------------------- -- 
 
2. (Sbu)  In a surprise to markets and the IMF staff, the GOT 
agreed to accept a 6.5% primary surplus target for 2005. 
Whereas GOT officials had been pressing the IMF mission 
(reftel) to accept a primary surplus of only 5 or 5.5%, the 
GOT announced late Tuesday that the 2005 target would be 
6.5%.  The announcement was made October 13 by Deputy Prime 
Minister Sener, following a meeting of the High Planning 
Council and confirmed by Economy Minister Ali Babacan.  At 
the same time, Sener announced the broad outlines of the 
budget including other, less controversial targets: 5% for 
GDP growth, 8% for inflation, and TL 156 Quadrillion ($104 
billion) for total expenditure. 
 
3. (Sbu) According to the IMF Deputy Resrep, the announcement 
represented GOT acceptance of the IMF staff's push for a 
primary surplus of at least 6.5%.  Whereas Fund staff had 
been concerned the GOT might try to fudge the numerical 
target by altering the definition, he confirmed that the 6.5% 
number announced Tuesday followed the standard IMF 
definition.  He also confirmed that the 2005 draft budget -- 
or at least its principal targets and broad outlines -- was 
the result of consultation with the Fund team currently in 
Ankara.  Having reached general agreement on next year's 
budget, the GOT can move ahead to submit the budget to the 
Parliament on October 17. 
 
4. (Sbu) The GOT reversal left observers scratching their 
heads about the internal dynamics of GOT decision-making. 
The Deputy Resrep was mystified about what had caused the 
turnaround, since the GOT had been pushing hard on the need 
for a lower target.  A well-informed private sector observer 
commented that this was another demonstration of the weight 
Babacan's and Sener's views carry in AK Party decision-making 
circles. 
 
Myriad Issues Remain: 
-------------------- 
 
5. (Sbu) The IMF staffer cautioned that many issues remain to 
be resolved before a letter of intent could be signed.  Even 
the 2005 budget, for example, needs to be fleshed out with 
details of how the primary surplus target will be achieved. 
He pointed out that the agreed budget outlines mostly concern 
the central government, whereas the 6.5% target is for the 
entire public sector, leaving many of the detailed policies 
relating to the rest of the public sector to be worked out. 
Nor have fiscal targets been agreed for 2006 or 2007. 
 
6. (Sbu) Specific tax measures -- another contentious issue 
with the IMF -- also remain on the table.  The Deputy Resrep 
said that GOT technocrats' earlier ideas about cutting 
Value-added Taxes and compensating with increases in the 
Special Consumption Tax on certain products, did not meet the 
approval of Prime Minister, who reportedly was less than 
enthused at the prospect of compensating a VAT cut with other 
taxes.  The Deputy Resrep admitted the Fund might be able to 
accept a very slight reduction in VAT taxes but that the 
devil will be in the details. Moreover, he did not rule out 
that VAT cuts could reemerge as a GOT proposal after the 
budget process is completed. 
 
7. (Sbu) On the banking law, he said much work remained to be 
done, though the GOT had agreed on a process that Fund Staff 
felt was encouraging.  After the BRSA finishes its re-write, 
the draft law will go to the government.  Since the BRSA, 
most of whose leaders are "sworn auditors," is unlikely to 
make the necessary compromises relating to the privileged 
power these auditors, the GOT has agreed to establish an 
interagency drafting committee.  The committee would be 
dominated by GOT officials, though the BRSA would be 
represented.  The Deputy Resrep said the key is GOT political 
will to change the draft, the technical work itself should 
not be that time-consuming. 
 
Tricky Timing for a Board Vote: 
------------------------------- 
 
8. (Sbu) Now that the pressure of the budget deadline is off, 
the Deputy Resrep said the Fund staff was in no rush to reach 
agreement on the many outstanding issues.  Given that the 
negotiations are over a three-year program, rather than a 
review, and there is no immediate financing need, Fund staff 
are inclined to take their time and make sure the issues are 
carefully worked out.  While he thought the current mission 
might have to stay longer than their planned departure date 
of October 26, he was hopeful they could wrap things up 
without an additional mission. 
 
9. (Sbu) Once all the issues are worked out, the Deputy 
Resrep said the timing of a board vote could be tricky.  On 
the one hand, the Fund staff may want to be sure the 
parliament passes the budget before going to the board.  On 
the other hand, the Fund might be reluctant to let the board 
vote get too close to the EU's December 17 decision on 
Turkish Accession, or to be perceived as overly skeptical of 
GOT commitments to pass its budget. 
 
 
 
EDELMAN