US embassy cable - 05ANKARA310

UNCLAS SECTION 01 OF 02 ANKARA 000310 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND RADKINS 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: REFORM DELAYS PUSH BACK TIMING OF IMF LETTER OF 
INTENT, BOARD VOTE 
 
 
1. (SBU) Summary: With the completion of the required "prior 
actions" likely to take several more weeks, the IMF board 
vote on Turkey's new Stand-by Program is unlikely to take 
place before March.  The delays seem to stem more from the 
complexity of the reforms, or internal Turkish issues than 
from lack of ownership or disagreement with the IMF.  With 
markets calm and no immediate GOT financing need, the delay 
is not that serious, but, if the delay persists Turkey runs 
the risk of spooking markets, particularly if there are 
other, unexpected market-unfriendly developments.    End 
Summary. 
 
Turkish Treasury Official Describes State of Play with IMF: 
--------------------------------------------- ------------- 
 
2. (SBU) Despite the joint IMF-GOT announcement December 14 
that the two sides had reached broad agreement on a new 
program, the GOT was required to take tangible steps on three 
major reforms before a Letter of Intent could be signed.  The 
IMF required that three major legislative reforms either be 
passed by the Council of Ministers and submitted to 
Parliament (Social Security and Banking) or passed by 
Parliament (Tax Administration).  Ozgur Demirkol, the 
Department Head in Turkish Treasury charged with coordinating 
the IMF negotiations, briefed econoffs January 13 on the 
state of play for each reform. 
 
Tax Administration Reform: 
------------------------- 
 
3. (SBU) The Tax Administration Reform needs to be passed by 
Parliament, since the IMF has been seeking this reform since 
well before discussions began on a new program last summer. 
The IMF has agreed with the GOT on the main features of the 
new law for some time.  Demirkol confirmed press reports that 
there continue to be disagreements within the Turkish 
bureaucracy about turf issues.  Much as the privileges of the 
Sworn Bank Auditors became central to negotiations over the 
Banking Law (see below), in the case of the Tax 
Administration, the tax inspectors are fighting to retain 
their separate status from the Tax Administration.  Demirkol 
pointed out that Finance Minister Unakitan is himself a 
former tax inspector.  In any case, Demirkol was optimistic 
that the law would go to the Prime Minister very soon, such 
that it can be approved by Council of Ministers and submitted 
to Parliament. 
 
Banking Law: 
----------- 
 
4. (SBU) The Banking Law, which had been a bone of contention 
between the Bank Regulatory and Supervisory Agency (BRSA) and 
the IFI's, has reportedly now been submitted to the Prime 
Minister's office by Deputy Prime Minister Sener.  Demirkol 
believes that the two features most objected to by the IMF 
and World Bank have been modified by the Government, 
overruling the BRSA.  The BRSA-drafted version had called for 
Sworn Bank Auditors to retain their monopoly of on-site 
inspection, ignoring the recommendations of the independent 
commission that investigated the Imar Bank collapse.  The 
other issue, according to Demirkol, was that the BRSA draft 
required undercapitalized banks to be intervened and then 
liquidated.  He said the IMF wanted regulators to have more 
flexibility to give banks a few months to try to take 
corrective action, so as to spare the state the unnecessary 
expense of a liquidation, if possible.   Despite these fixes 
by the government, which should be sufficient to satisfy the 
IFI's, Demirkol noted that the general restrictiveness and 
prescriptiveness of the BRSA's approach to the law remains. 
 
Social Security Reform: 
---------------------- 
 
5. (SBU) The Social Security Reform is probably the most 
politically sensitive and revolutionary of the three reforms. 
 Though the World Bank and Social Security Institution (SSK) 
disagreed about assumptions in the projections used to 
formulate pension options for consideration by the Prime 
Minister, Social Security officials told econoffs this issue 
has been resolved.  The disagreement caused a delay, however, 
in the technocrats' planned presentation to the Prime 
Minister, causing a window of opportunity to be missed. 
Separately, Social Security Director Tuncay Teksoz explained 
that three key targets have been agreed with the IMF: the 
total Social Security Deficit will be not surpass the current 
4.5% of GNP level in the short run, savings of 1% of GNP will 
be achieved by 2015, and in 20 to 30 years the deficit will 
brought down to only 1% of GNP.  Demirkol and one World Bank 
official said that the IFI's leave the GOT to decide which 
options to use to achieve the savings, so long as the overall 
targets are met (and the assumptions used are conservative). 
 
6. (SBU) The Social Security Reform has also been held up by 
delays over GOT consultation with labor unions.  A meeting 
planned for the same day Parliament considered the 
controversial law transferring Health Ministry hospitals to 
the SSK was boycotted by the unions in protest.  Teksoz told 
us they needed to have a meeting with social partners and 
factor in their comments before the law could be officially 
submitted to the Prime Minister's office.  Meanwhile, he said 
that the Prime Ministry was reviewing the laws (there are 
four of them) on an unofficial basis.  Though the Social 
Security Reform is expected to harm the interests of the 
public sector unions, Teksoz did not expect great political 
difficulty with the reform. The grandfathering of existing 
accrued pension rights, the unfairness of the current system 
with its multiple regimes, the long phase-in period for 
changes, and the adoption of universal heath insurance should 
help the GOT sell the reform to the public, in his view. 
 
Other IMF issues: 
---------------- 
 
7. (SBU) Demirkol confirmed local IMF officials' comments to 
us that they could accept the lower (8% rather than 18%) VAT 
rate on food, education and health services.   Demirkol 
explained that not all food items were covered, and that some 
of the items with the lower rate--such as the ubiquitous 
bagel-like "simits" sold on every street corner--are largely 
in the untaxed informal economy any way.  For this reason, 
Demirkol asserted there would be very little tax revenue lost 
from the lower rate. 
 
8. (SBU) Demirkol and a local World Bank official also 
shrugged their shoulders over the Prime Minister's 
announcement of reduced interest rates on state bank loans to 
farmers and small business.  They said the relatively modest 
amount of money was transparently budgeted for, and was not 
in violation of any understanding with the IFI's.  The World 
Bank official surmised that the Prime Minister was under 
pressure to carry through on his promise of a "surprise" but 
was constrained from repeating last-year's yearend populist 
surprise minimum wage and pension payment increases. 
 
Rumored Reorganization of Economic Ministries: 
--------------------------------------------- 
 
9. (SBU) The Turkish press is reporting that Minister Babacan 
will be named EU negotiator, while Treasury and the Ministry 
of Finance will be merged under Minister Unakitan.  Demirkol 
confided that higher-level colleagues were hinting the 
reports were accurate.  Treasury staff are now worried that 
the distinct, pro-reform Treasury culture could be subsumed 
into the more traditional civil servant culture of the 
Ministry of Finance. 
 
Comment: 
------- 
 
10. (SBU) The local IMF representative shares our take that 
the delays do not seem to be related to lack of GOT ownership 
of the reforms.  However, both the Resrep and Demirkol agreed 
that if they drag on too much further markets could get 
jittery, particularly if there are other negative 
developments.  Moreover, rumors of a government 
reorganization could have the effect of tending to postpone 
tough decisions, if the economic ministries really are going 
to be reorganized. 
EDELMAN