US embassy cable - 04ANKARA6594

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006594 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: DECL: 11/26/2009 
TAGS: EFIN, TU 
SUBJECT: IMF CAUTIOUSLY OPTIMISTIC THAT NEW PROGRAM CAN BE 
AGREED BY MID-DECEMBER 
 
REF: ANKARA 6426 
 
Classified by DCM Robert S. Deutsch.  Reasons 1.5 (b) and (d). 
 
1.  (C)  Summary:  A third and hopefully final IMF mission 
negotiating a new 3-year stand-by program will return to 
Turkey November 30 with hopes of concluding discussions 
before EU leaders meet December 17.  The IMF's return follows 
what both the IMF and Turks view as substantial progress on 
Turkey's part (including in dropping a push for a VAT rate 
cut) since the second mission failed to reach agreement in 
October.  The Fund's work has been more difficult than 
expected, and the Turks may still seek to use the December 17 
meeting to leverage new concessions, such as on the size of 
IMF financing.  End Summary. 
 
Mission coming in hopes of a deal by mid-December 
--------------------------------------------- ---- 
 
2.  (SBU)  The IMF announced November 24 the return of a 
"mission" November 30.  According to the Fund's resident 
representative, IMF staff is cautiously optimistic of 
reaching broad agreement on a new program in a couple of 
weeks although, as was the case with several reviews under 
the current program, a few actions may remain to be taken 
after the mission departs before a Letter of Intent (LOI) can 
be signed.  (The resrep did not rule out the possibility that 
a LOI could be signed by mid-December.)  Although the resrep 
said the Fund does not feel any deadline pressure, Minister 
Babacan and other Turkish officials are keen to be able to 
announce agreement with the IMF before the EU Council decides 
on Turkey's application for EU membership on December 17. 
 
Significant Progress on Outstanding Issues 
------------------------------------------ 
 
3. (SBU) The resrep confirmed Turkish officials' comments 
(ref) that they have made significant progress on issues left 
open after the October mission: 
 
--VAT rates: The GOT dropped its proposed broad rate cut, as 
well as narrower rate cuts for sensitive sectors.  There may 
be some very minor changes but no significant rate cut. 
 
--Tax Administration:  The IMF believes the current draft of 
the tax law takes into account everything the Fund was 
looking for.  For example, responsibility for tax policy 
would be in the Ministry of Finance rather than in the Tax 
Administration. 
 
--Social Security Reform:  While there is not yet unequivocal 
political commitment to either push back retirement ages or 
increase social security payroll taxes, IMF staff believes 
the progress the World Bank has made on the technical level 
supports a belief that agreement can be reached during the 
mission. 
 
--Banking Law: Fund staff has not seen the latest draft from 
the bank regulatory agency (BRSA) which is in the process of 
being transmitted to Deputy Prime Minister Sener and the 
Prime Minister.  The Resrep believes that Turkish Treasury 
will help get the GOT to overrule the BRSA's continued 
insistence that sworn bank auditors retain their monopoly of 
on-site inspection. 
 
--2004 fiscal overperformance:  The IMF and GOT are moving 
towards a solution, helped by the fact that special revenue 
receipts have been lower than the IMF and Turks had thought 
in October would be the case. 
 
--State Banks:  With the World Bank having begun to rethink 
this issue in October, the IMF may limit itself at the 
beginning of a program to "damage-limitation actions" rather 
than agreement on a comprehensive privatization strategy. 
For example, the program could initially include removing 
State Banks' privileges and constraining the use of their 
capital, with more far-reaching actions implemented over the 
course of the program. 
 
Privatization and Asset Sales 
----------------------------- 
 
4.  (SBU)  The resrep said the new program would likely not 
include enforceable privatization targets.  The IMF is 
reluctant to make targets other than indicative ones given 
the ability of the courts to block privatizations.  Fund 
staff will be closely monitoring progress in 2005, however, 
particularly regarding any GOT hesitancy to sell SEE's below 
an artificial "reserve price"  The program will also include 
indicative targets on SDIF asset sales from intervened banks. 
 SDIF has already proposed legislation indemnifying buyers of 
these assets from lawsuits. 
Size of Facility 
---------------- 
 
5.  (SBU)  Fund staff continues to believe the Turks will 
seek IMF financing greater than the parameters the Executive 
Board set before the first mission.  Babacan reportedly did 
not raise the issue in his meeting with IMF Managing Director 
Rato on the margins of the G-20 meetings in Berlin.  The 
resrep thinks Minister Babacan has taken to heart Fund staff 
advice that it would be better to wait until they are closer 
to agreement before the GOT weighs in with Fund management. 
Comment 
------- 
6.  (C)  The failure of a third mission would be 
unprecedented for Turkey and send a very negative signal to 
markets.  Yet the Fund's work has been more difficult than 
either it or the Turks anticipated, and we are not yet at the 
end of the road.  The Fund's difficulties demonstrate the 
lack of high-level political will on difficult but 
unavoidable structural reforms, even in what would seem to be 
a conducive macro environment (GDP growth double initial 
forecasts and lower than expected inflation and unemployment 
rates.)  While Babacan and the technocrats feel a need to 
announce agreement before the EU meeting, we do not exclude a 
last minute Turkish push for new IMF concessions -- such as 
on the size of the financing -- that would seek to leverage a 
December 17 "deadline." 
EDELMAN