US embassy cable - 05ANKARA1093

UNCLAS SECTION 01 OF 02 ANKARA 001093 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR INTERNATIONAL AFFAIRS - ASHAH AND CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: IMF RESREP MORE HOPEFUL ABOUT STANDBY AGREEMENT 
 
REF: A. ANKARA 1075 
 
     B. ANKARA 944 
     C. ANKARA 812 
 
1. (SBU)  Summary: IMF Resrep confirmed that the GOT has 
decided to water down its proposal 
 to expand the investment incentives law, thereby opening the 
way to resolving the current 
standoff with the IMF.  Provided the GOT: a)follows through 
on revising the investment incentives 
law so that it costs less; b) comes up with acceptable 
quality offsetting measures; and c) 
completes the outstanding prior actions, the Resrep believes 
there could be a board vote on 
the new standby in April. End Summary. 
 
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GOT Watering Down Investment Incentives: 
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2. (SBU) In a February 24 meeting with Econ officers  just 
following the Ambassador's separate meeting with 
Minister Babacan (ref A), the IMF Resrep largely confirmed 
Babacan,s version of the state of play with the IMF, 
albeit with a less positive spin.  If the GOT follows through 
on its stated willingness to narrow the scope of application 
of the amendment to the investment incentives law, and is 
able to head off parliamentary attempts to keep the scope as 
broad as possible, the Fund could accept good quality 
compensatory measures. The narrowed expansion of the 
investment incentives would only cost 0.1% of GNP according 
to the Resrep, though press reports put the figure at 
YTL 1 billion or closer to 0.3% of GNP. 
 
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Thanks to IMF Going Public: 
------------------------------ 
 
3. (SBU) The GOT willingness to backpedal on the investment 
incentives, however, has led Fund staff to feel 
vindicated about its decision to "go public" with its 
criticism of the scheme.  However much this irritated the 
GOT, 
the IMF rep thinks it was worth it in order to demonstrate 
that it was a serious issue on which the Fund would not 
back down.  The Resrep said that were the proposed expansion 
to stand as originally submitted to parliament, it would 
have been too costly for the Fund to accept compensatory 
measures that would meet acceptable quality standards and 
would have scuttled the program as agreed in December. 
 
4. (SBU) Nor does the Resrep believe that the GOT retreat 
demonstrates the existence of an ironclad GOT consensus 
on the need for the IMF.  Though he believes that the 
isolationist view--i.e. that Turkey could go it alone without 
the 
IMF, as described to us by Governor Serdengecti in ref B--has 
now been knocked down, it certainly reared its ugly 
head over the past two months.   As for Babacan,s assertion 
that Krueger and Erdogan reached an understanding at 
Davos on the investment incentives, the Resrep believes the 
Turkish side misinterpreted Krueger, and in any case this 
does not explain why the GOT surprised the IMF with the 
investment incentives after publicly announcing agreement 
on a framework December 14.  IMF staff suspect that Turkish 
Treasury staff were working on the investment incentives 
expansion prior to December 14. 
 
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Still Need Prior Actions: 
----------------------- 
 
5. (SBU) The Resrep confirmed that, aside from the investment 
incentives issue, completion of the three prior actions in a 
form satisfactory to the IMF is not yet completely assured. 
The Banking Law seems to be about to go to the Council of 
Ministers in an IMF-compliant form and the internal Ministry 
of Finance turf fight about the Tax Administration Reform 
Law that requires Prime Ministerial arbitration is not viewed 
as a critical issue by the IMF (the issue is whether the tax 
inspectors should be integrated into the Tax Administration 
rather than remain a separate board).  Finance Minister 
Unakitan, 
himself a former tax inspector, is opposed to this 
integration, whereas Prime Ministry Undersecretary Dincer and 
Deputy 
Prime Minister Sener are reportedly in favor. 
 
6. (SBU) However, the GOT has yet to decide by which measures 
the Social Security Reform will achieve the intended 
cost savings.  Though the GOT committed to the IMF and World 
Bank that it would tweak the pension system rules in 
such a way as to achieve specific medium- and long-term cost 
savings, the devil is in the details.  According to the 
Resrep, 
the Prime Minister has drawn red lines around some parameters 
he will not touch, thereby making it harder to find the 
necessary savings from other parameters.  (Though the Resrep 
did not specify the parameters, they include: indexation 
of benefits, valuation of contributions, retirement age, 
replacement ratio, and years of service required to qualify 
for benefits). 
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Staving Off Other Bad Ideas: 
--------------------------- 
7. (SBU)  Aside from the investment incentives and the three 
prior actions, the Resrep said the IMF also has to keep an 
eye out for some bad ideas that continue to crop up.  One of 
these is the idea of a VAT rate cut for the textile sector, 
an idea 
Fund Staff thought they had successfully killed in the fall. 
(Since the meeting with Resrep, press reports suggest this 
idea is 
very much alive.)  Another bad idea is a proposal to have the 
state pick up the cost of businesses' severance payments when 
employees are laid off. 
 
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No Hard Financing Constraint: 
---------------------------- 
 
8.  (SBU) Despite a large repayment to the IMF due in May, 
the Resrep believes that Turkish Treasury could make these 
payments even if the IMF has not yet disbursed its first 
tranche beforehand.   With Eurobond issuances well ahead of 
Treasury,s 
planned external borrowing plan, and continued strong demand 
for domestic issuances, the Resrep does not believe the May 
payment is a hard constraint. 
 
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Timing of Next Steps: 
--------------------------- 
 
9. (SBU) The Resrep said that a full mission will need to 
return to Turkey, given the time elapsed since the draft LOI 
had been 
drawn up.  The mission is unlikely to engage in much 
negotiating: it will mostly confine itself to updating 
numbers and revising 
dates.  The mission will not come, however, until the prior 
actions are taken.  He thought that a board meeting in early 
April was 
possible, provided the GOT moved relatively quickly to 
resolve the outstanding issues. 
EDELMAN