US embassy cable - 04ANKARA6426

UNCLAS SECTION 01 OF 03 ANKARA 006426 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EUR/SE, AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT: GOT TECHNOCRATS ON IMF NEGOTIATIONS: SLOW BUT 
STEADY PROGRESS 
 
REF: ANKARA 6135 
 
1.  (SBU) Summary:  Turkish economic technocrats describe 
slow but steady progress on the many issues outstanding when 
the IMF mission left Ankara late last month, including social 
security reform, VAT tax rates, and a new banking law. 
Difficult political decisions remain to be made -- 
particularly on social security pension reform -- but it 
seems increasingly likely that IMF talks could resume in 
early December and that a letter of intent could be concluded 
before the December 17 EU decision on Turkish accession, 
although the timing will be tight.  A strong U.S. message of 
support for the IMF when Secretary Snow sees Minister Babacan 
November 20 would help reinforce the political dynamic in 
Turkey in support of an effective new IMF program.  End 
Summary. 
 
2.  (SBU) In a series of meetings before the November 12-16 
Bayram holiday, economic technocrats described substantial 
progress on the many issues outstanding when the second IMF 
mission left town in late October.  Though several tough 
issues remain, a number of others have been resolved and the 
remaining issues are mostly either being framed for 
high-level decision or will have to be hashed out with the 
IMF in the final stages of the negotiation. 
 
3.  (SBU) The tone of our meetings was surprisingly positive. 
 In contrast to discussions following previous IMF missions, 
none of the officials seemed angry with or irritated at the 
IMF, even when they disagreed with the IMF,s position, and 
some were openly sympathetic to the IMF,s arguments. 
 
Backing Away from VAT Cut? 
-------------------------- 
 
4.  (SBU)  Treasury Undersecretary Ibrahim Canakci and an 
exhausted-looking Director of Tax Administration Osman 
Arioglu told us separately that the GOT had hoped to couple a 
reduction in VAT tax rates with a major campaign to improve 
tax compliance.  (Arioglu claimed that improvements in the 
tax administration,s information technology would be a big 
help in tracking delinquent taxpayers.)  However, several 
officials said the Turks had now given up on a generalized 
VAT rate cut, but were still hoping to convince the IMF to 
allow a rate cut limited only to certain sectors, notably 
textiles.  Arioglu argued that given the high level of tax 
fraud in the textile sector, a lower rate combined with 
tougher enforcement would boost collections.  He also thought 
the revenue impact of a rate cut would be offset by lower VAT 
rebates on exported textiles.  Nevertheless, both Arioglu and 
Deputy Budget Director Ahmed Kesik told us the IMF remained 
opposed to any VAT rate cuts.  Kesik thought the Turkish side 
would eventually give in, and seemed sympathetic to the IMF 
argument. 
 
Special Consumption Tax Hikes Seem Agreed 
----------------------------------------- 
 
5. (SBU) Kesik also said the IMF had agreed to the recently 
announced hike in the Special Consumption Tax (SCT) on autos, 
which many economists hope will help moderate surging auto 
imports.  Kesik confirmed press reports that there will be 
significant increases in the SCT rate for a variety of 
products, most likely including tobacco, alcohol, and 
petroleum products.  Kesik noted that with revenue targets 
substanially above projected inflation, the GOT will rely on 
SCT rate increases to finance the increase in investment in 
the 2005 budget.  On Personal Income Tax rate changes, State 
Planning Organization Deputy Undersecretary Birol Aydemir 
said any change in tax rates would be revenue-neutral. 
 
Tax Adminstration Reform Differences Narrowing 
--------------------------------------------- - 
 
6. (SBU) A new draft Tax Administration reform law -- an 
oft-postponed reform under the existing IMF program -- is 
being negotiated both with the IMF and between the Ministry 
of Finance and the Prime Ministry.  After months in which 
multiple contacts told us that the Prime Ministry staff, led 
by Undersecretary Omer Dincer, had reservations about the 
draft law prepared by the Ministry of Finance,s Tax 
Administration, the number of issues has now been 
significantly narrowed.  The two principal remaining ones are 
whether the Tax Administration should have responsibility for 
tax policy (as desired by the Tax Administration and opposed 
by the IMF) and whether the tax audit function should be 
merged into the Tax Administration (as desired by the Prime 
Ministry Undersecretary).  Currently, tax audit is the 
responsibility of the board of tax auditors which, although 
it is also under the umbrella of the Ministry of Finance, is 
a separate board.  Aydemir was optimistic the GOT would 
resolve the dispute and achieve final agreement with the IMF 
on the draft law. 
 
Politically Tough Social Security Reforms Moving 
--------------------------------------------- --- 
 
7.  (SBU) Canakci and Aydemir confirmed that the health 
insurance component of the social security reform had been 
approved by the Council of Ministers.  But the more 
politically-difficult reform of the social security pension 
system had not yet come to the Prime Minister for a final 
decision.  Canakci said Ministers Babacan (Economy), Unakitan 
(Finance), and Basesioglu (Labor) met November 8 to hammer 
out final details but would only make a detailed presentation 
to the Prime Minister for decision after Bayram.   Several 
officials, including Central Bank Governor Serdengecti, 
emphasized the political difficulty of deciding how much to 
push back retirement ages and/or to increase current social 
security payroll taxes.  The political pain can be eased by 
long or gradual phase-ins but the IMF insists on a clear 
commitment to reduce the huge deficits in the social security 
system, currently running at 4 percent of GDP. 
 
Banking Law Stuck on Role of Sworn Auditors 
------------------------------------------- 
 
8.  (SBU) The officials all said that the IMF and World Bank 
joint team that came to Turkey the week of November 8 had 
reached broad agreement on the text of a draft banking law, 
with the exception of the issue of sworn bank auditors 
retaining a monopoly on on-site inspection.  BRSA Chairman 
Tevfik Bilgin, himself a former sworn bank auditor, is 
reportedly not budging on this issue, but neither is the IMF: 
the independent commission that investigated the Imar Bank 
collapse found that the sworn bank auditor monopoly on 
inspection contributed to regulators, lack of awareness of 
the fraud at Imar. 
 
Privatization Not Breaking New Ground 
------------------------------------- 
 
9.  (SBU) Officials gave conflicting accounts of how much 
importance the new program is likely to place on 
privatization.  Ozgur Demirkol, the working-level Treasury 
official responsible for coordination of IMF negotiations, 
claimed that the new program would give privatization a big 
push.  State Planning's Aydemir, on the other hand, made the 
usual GOT lament about how difficult it was to set targets 
when the courts stymie GOT privatization efforts.  Asked 
about the possibility of legislating protections against 
judicial prosecution of officials selling state enterprises 
below a notional "value" -- a protection that might have 
allowed last year,s Tekel tobacco privatization to go 
through -- Aydemir said this was too difficult politically. 
He said the government had been unable to legislate similar 
protections for bank regulators, even though badly needed to 
allow regulators to fulfill their responsibilities. 
 
Pushing for Larger Access to IMF Funding? 
----------------------------------------- 
 
10. (SBU) Senior GOT officials were closed-mouthed on the 
size of the financing.  However, mid-level Treasury official 
Ozgur Demirkol specifically asked for U.S. support on the 
size of the financing -- with Turkey desiring an amount 
substantially above the bottom of the board-approved range in 
order to give the markets confidence.  Note:  Minister 
Babacan may well make a pitch on this issue to senior USG 
officials, including at his November 20 bilateral with 
Secretary Snow.  End Note. 
 
SIPDIS 
 
Timing is Tight 
--------------- 
 
11. (SBU) Turkish officials still hope to be far enough along 
to convince the IMF to return after Thanksgiving, and to wrap 
up agreement on a draft Letter of Intent (LOI) before the 
December 17 EU meeting.  Central Bank Governor Surreya 
Serdengecti said he had urged the government to move 
expeditiously to wrap up a program several months ago, to be 
sure and have a program in hand at the time of the EU 
decision.  He noted that his counsel was not heeded.  He 
believes the absence of an IMF program helps anti-Turk voices 
in the EU.  Canakci told us it would be desirable to have 
agreement on a draft LOI before December 17, just in case the 
decision went against Turkey's accession. 
 
Comment 
------- 
12. (SBU) Secretary Snow's November 20 meeting with Minister 
Babacan in Berlin offers an excellent opportunity to 
reinforce the IMF's insistence that a new program contain 
meaningful structural reforms.  We are not able to 
substantiate recent press reporting that the Prime Minister 
is becoming increasingly impatient with Babacan's advocacy of 
an economically rigorous approach, but such a message of 
support would likely strengthen Babacan's influence in senior 
political councils.  If pressed by Turkish officials on the 
size of the IMF financing, post recommends we maintain 
support for the low end of the financing range, in order to 
keep pressure on the GOT to maximize its own efforts by 
privatizing state enterprises, selling the assets of failed 
banks, and collecting more tax revenues. 
EDELMAN