US embassy cable - 05ANKARA1727

C O N F I D E N T I A L SECTION 01 OF 03 ANKARA 001727 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: DECL: 03/24/2009 
TAGS: EFIN, TU 
SUBJECT: MOVEMENT ON IMF CONDITIONS HELPED BY MARKET 
SELL-OFF 
 
REF: A. ANKARA 1559 
 
     B. ANKARA 1318 
     C. ANKARA 1093 
     D. ANKARA 812 
 
Classified By: Economic Counselor Thomas C. Goldberger for reasons 1.4( 
b) and (d). 
 
1. (SBU) Summary: The GOT has re-energized its efforts to 
complete the prior actions needed to finalize its IMF new 
program.  Following a recent sell-off in Turkish markets, the 
GOT seems to be moving on the three prior actions: Tax 
Administration Reform Law, Banking Law and Social Security 
Reform Law. Though Minister Babacan has publicly explained he 
need for an IMF mission to come back in April, and is hoping 
for agreement on a Letter of Intent by mid-April, resolution 
of the expanded regional investment incentive issue and 
compensating measures could push conclusion of an LOI to a 
later date.  End Summary. 
 
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A Re-energized Effort on Prior Actions 
-------------------------------------- 
 
2. (SBU) After three months of excruciatingly slow movement 
on the prior actions required to complete the Letter of 
Intent, the GOT appears to have been roused to action in 
recent days.  Two economic officials who serve on the GOT 
negotiating team with the IMF separately confirmed press 
reports that the GOT is trying to speed things up.  These 
officials, while not certain of what changed after months of 
inertia, agree with press claims that the GOT was worried by 
the market sell-off during the week of March 14 and correctly 
feared that a Federal Reserve rate hike would unleash a round 
of selling.  On March 23, Central Bank Governor Serdengecti 
made his bluntest public warning to date on the need for the 
GOT to finalize the IMF program, saying the longer the IMF 
program is delayed "the more dangerous I would find it." 
Reading between the lines of the officials' comments, 
Minister Babacan, who had been unable to convince the Prime 
Minister to take decisive action in January and February, 
used the sell-off to galvanize the Cabinet and Prime Minister 
to action on the prior conditions. 
 
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Social Security 
--------------- 
 
3. (C) Perhaps the best example of this was the announcement 
that the Social Security Reform Law, which had been stalled 
for months, was "open for signature" at the Council of 
Ministers.  (When laws are opened for signature, all the 
staff work below the ministerial level has been completed and 
all that remains is Council of Ministers approval.  It does 
not necessarily mean that disputes between ministers have 
been resolved since laws that have been opened for signature 
are sometimes changed.)  State Planning Organization Deputy 
Undersecretary Birol Aydemir confirmed to Econoff that the 
Prime Minister has made the necessary--and 
politically-difficult--decisions on which parameters 
(retirement age, valorisation of rights, indexation of 
payments, etc.) will be altered by the law.  Aydemir said 
that the PM's decision came following a series of meetings 
with Ministers Babacan and Minister of Labor Basesgioglu. 
 
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Tax Administration 
------------------ 
 
4. (C) The Tax Administration Reform Law, the only law which 
the IMF is requiring be passed by Parliament as a prior 
action (the others only need to be submitted to Parliament) 
was approved by Council of Ministers and submitted to 
Parliament in late February.  Unfortunately, the same issue 
that split the Council of Ministers has reportedly spilled 
over into the Parliamentary debate, with the Budget Committee 
sending the bill back to sub-committee for further work 
earlier this month.  The dispute pits the Board of 
Accountants and powerful alumni such as Minister Unakitan, 
Tax Administration Director General Arioglu and Finance 
Ministry Undersecretary Basri Aktan against the Tax 
Controllers and their alumni such as Deputy Prime Minister 
Arioglu.  The issue relates to the special status of these 
two groups and their respective roles in tax auditing. 
Aydemir confirmed, however, that the GOT is urging 
parliamentarians to speed up their work on this law. 
 
----------- 
Banking Law: 
----------- 
 
5. (SBU) The Banking Law, which had been opened for signature 
several weeks ago, continued to be the subject of contention, 
as Bank Regulatory and Supervisory Agency (BRSA) Chairman 
Tevfik Bilgin fought a rearguard action against two aspects 
of the bill that the IMF had insisted on.  The two issues 
are: a) allowing the Savings Deposit Insurance Fund (SDIF) 
the flexibility not to liquidate a bank immediately after a 
takeover; and b) ending the Sworn Bank Auditors' monopoly on 
on-site bank inspection.  As with the Accountants Board/Tax 
Controllers issue, Bilgin's ferocious opposition has 
everything to do with his defending the privileges of his 
fellow Sworn Bank Auditors and little to do with policy.  On 
March 21, Deputy Prime Minister Sener overruled Bilgin and 
insisted on keeping the IMF's demands in the law, at which 
point Bilgin asked for a meeting with the Prime Minister. 
Bilgin is expected to appeal to the Prime Minister about the 
law and there is speculation Bilgin will resign if his appeal 
fails.  Once Bilgin has his meeting, the law can reportedly 
be approved by the Council of Ministers and submitted to 
Parliament. 
 
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Babacan on Timing 
----------------- 
 
6. (C) In an interview on CNN-Turk March 23, Babacan 
explained that an IMF team would need to come to Turkey to 
update the LOI, since more than three months had passed since 
broad agreement was reached on a draft LOI.  In what may have 
been an effort to create some deadline pressure, Babacan went 
on to say that the GOT should be able to reach agreement with 
Fund staff on a LOI before the Spring IMF/World Bank meetings 
in mid-April.  However, the Turkish Treasury Department Head 
who coordinates work on the IMF program, admitted to econoff 
that the LOI will probably take longer to complete.  Demirkol 
agreed that, even if the Government pushes through the three 
prior actions in the next week or two, the IMF team's work on 
revising targets, deadlines and projections, coupled with 
resolution of the regional investment incentives scheme issue 
and compensating fiscal measures are likely to take time.  On 
the other hand, Birol Aydemir claimed that the investment 
scheme issue would not drag things out and chuckled that he 
and his colleagues have become adept at working out 
compensating fiscal measures quickly, as they have done 
several times in negotiations over IMF reviews. 
 
------------------------------ 
Regional Investment Incentives: 
------------------------------ 
 
7. (SBU) Though the original, costly version of the expanded 
regional investment incentives scheme--the version the IMF 
insists it cannot accept--was long ago submitted to 
Parliament--both Turkish officials and the IMF say that the 
GOT has agreed to instruct Parliament to change the text to a 
much less costly version that would narrowly target only 
newly-created jobs.  Aydemir said that the economic 
bureaucracy, with the approval of Babacan, have drafted such 
a proposal, but that the Prime Minister still needs to 
approve it before Parliament can get its revised marching 
orders.  Aydemir insists the IMF is way off on its estimates 
of what the revised version would cost, with Aydemir claiming 
it would cost only $50-60 million per annum, an amount for 
which it will be easy to find compensating measures. 
 
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Comment: 
------- 
 
8. (C) It may be that Aydemir's confidence about finding 
compensating measures is linked to increasing GOT confidence 
that Turkey will overperform on its fiscal targets in 2005: 
Minister Unakitan recently crowed about the overperformance 
in January and February and Babacan noted in his CNN-Turk 
interview that the 2004 primary surplus reached 6.9%. 
Outside observers, however, do not count on the continuation 
of fiscal overperformance, for two reasons.  In 2004, Turkey 
overperformed in the first half of the year, while 
performance lagged near the end of the year.  This year, 
economists outside the government also worry that expected 
slower growth will hit revenue collection hard, particularly 
since about 70% of collections come from indirect taxes.  It 
seems unlikely, therefore, that the IMF would accept gambling 
on fiscal overperformance and give the GOT a pass on 
high-quality compensating measures for the investment scheme. 
 
9. (SBU)  The disagreement over the cost of the regional 
investment incentives lends credence to the view that it may 
take more time to reach agreement with the Fund.  Moreover, 
both Ozgur Demirkol at Turkish Treasury and the IMF Resrep 
have told us the IMF will be very tough on the quality of the 
compensating measures, rejecting any cuts in the investment 
budget.  Given that the GOT has repeatedly raised taxes, 
especially indirect taxes, in recent years, and that the 
Prime Minister is very keen to cut rather than raise tax 
rates, tax increases would not appear to be a likely source 
of compensating measures.  This leaves only cuts in current 
spending, a politically difficult option for the Government 
with increasing rumors of early elections and a series of 
parliamentarians resigning from the AK Party. End Comment. 
DEUTSCH