US embassy cable - 04ANKARA5999

UNCLAS ANKARA 005999 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EUR/SE, EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT: SLOW MOVEMENT ON IMF NEGOTIATIONS 
 
REF: ANKARA 5835 
 
1. (Sbu) Summary: According to the IMF Resrep, negotiations 
with the GOT 
on a new Standby are moving forward slowly.  Though a major 
step was achieved 
with agreement on headline 2005 budget numbers, the details 
of tax reforms and 
the absence of progress on a banking law remain to be sorted 
out.  Though none 
of the problems seemed insurmountable, they will take time, 
and may well require 
a third mission in November.  End Summary. 
 
2. (Sbu) In a phone conversation just before going into a 
negotiating session, 
the IMF Resrep provided a general overview of the state of 
play, promising a 
fuller brief next week. He said there wasn't much to tell 
because so much remained 
to be worked out.  Agreement on headline numbers for the 2005 
budget--especially 
the 6.5% primary surplus target (reftel)--had obviously been 
a signficant step 
forward.  Other issues, while not insurmountable, were taking 
much longer than 
IMF staff had anticipated.  As after the first mission, the 
Resrep said the GOT 
had not adequately prepared for the mission. 
 
3. (Sbu) The biggest single area of difficulty is the details 
of tax reforms. 
These involve both medium-term measures to rationalize 
taxation and specific 
measures for 2005.  Since the budget has already been 
submitted to parliament, 
the Resrep said that for 2005 the measures would have to be 
revenue-neutral, 
which is difficult. The GOT has provided its ideas to Fund 
staff and staff has 
responded with its own (unspecified) proposals. 
 
4. (Sbu) Lack of progress on the new banking law (a key 
structural reform) is 
also holding up negotiations. A World Bank expert (septel) 
working with the Fund 
told us there had been virtually no progress on the banking 
law during this mission 
because the bank regulators had proposed new, unacceptable 
features.  Fund staff had 
to go over the regulators' heads to secure Minister Babacan's 
agreement to go back 
to negotiations on the basis of the August draft. 
5. (Sbu) In terms of timing and next steps the Resrep said 
that little had been 
decided.  It was not yet clear whether the mission would 
leave as planned October 
26 or extend its mission.  It could also return in November. 
(The Bank expert told 
us the joint World Bank-IMF team on the banking law would 
return the week of 
November 9.) 
 
6. (Sbu) Without explicitly saying so, the Resrep implied 
that the mission and GOT 
had not yet reached agreement on the size of the financing 
gap and the amount of 
Fund financing the authorities would request. The Resrep 
pointed out that, under 
exceptional access country rules, staff still needed to get 
definitive authorization 
from the IMF  board to conclude negotiations for a specific 
amount.The Resrep said 
that the staff had hoped to go to the board "remotely" while 
in Turkey, but that 
now was considering going to the board after returning to 
Washington. 
 
7. (Sbu) Comment:  Though we will have to await next week to 
get the details, Fund 
staff seems to be exercising caution and trying to get things 
right.  Continued USG 
support for the Fund's efforts could only help at this stage. 
 
EDELMAN