US embassy cable - 05ANKARA2161

UNCLAS SECTION 01 OF 02 ANKARA 002161 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR OASIA - C. PLANTIER 
 
E.O. 12958: N/A 
TAGS: EFIN, TU 
SUBJECT: Turkish Parliament Moves on IMF Prior Action 
 
 
Sensitive but Unclassified. 
 
1. (SBU)  Summary:  With the April 14 passage of a new 
Tax Administration Reform law, Turkey has satisfied the 
remaining "prior action" for finalizing a Letter of 
Intent (LOI) for a new three-year IMF stand-by 
program.  However, differences with the IMF over 
controversial amendments to the regional investment 
incentives law still need to be resolved before final 
Executive Board approval of the program, which both 
Fund staff and the Turks expect to happen in May.  Even 
after approval, implementation of a new program will 
continue to be rocky and difficult.  End Summary. 
 
2.  (SBU)  The Turkish Parliament finally adopted the 
long delayed Tax Administration Reform Bill on April 
14.  Under this reform, Turkey will establish a 
separate and a more powerful tax administration 
office.  This should create a more efficient revenue 
collection system that will help reduce the size of 
Turkey's unregistered economy, which is estimated to 
account for 40-50% of the total economic activity. 
The law will abolish the existing General Directorate 
of Revenues (GDR) and replace it with an independent 
Tax Revenue Administration.  The Finance Ministry will 
continue to make tax policy, but the new Tax 
Administration will be in charge of implementing these 
policies.  The law will also require establishment of 
Regional Tax Administration Units.  Despite the law's 
good intentions, Yuksel Karaca, Deputy Director-General 
of the GDR expressed skepticism to ECON Specialist 
about how it will be implemented.  He opined that the 
law would do little more than change the names of 
already existing units. 
 
3.  (SBU)  An IMF mission, which had been in Ankara for 
10 days, completed its work and held a press conference 
together with State Minister Ali Babacan on April 12. 
 In the press event, the two sides said they had 
finalized agreement on the details of the economic 
program described in the Letter of Intent, which 
remains to be approved by Fund management.  Minister 
Babacan reiterated his expectation that the IMF 
Executive Board will meet in the first half of May to 
approve Turkey's LOI.  Although both sides gave a 
positive picture, the IMF mission left Ankara without 
completely resolving differences over the regional 
investment incentives law.  The GOT has come up with a 
new formula that would, according to press reports, 
increase the number of provinces covered by the law, 
but reduce the scope of the financial incentives, with 
a resulting lower overall cost than was originally 
proposed.  The Prime Minister has apparently not yet 
given final approval to these revisions and the Turks 
and IMF have not yet resolved how the additional cost 
will be accommodated within the 6.5% of GDP primary 
budget surplus target.  Babacan, however, claimed that 
the cost would be negligible.  Karaca told Econ 
Specialist that his department had discussed the 
Incentives Law with the IMF, reached agreement on 
certain aspects of the Law, and come up with a cost 
figure, which he could not share at this stage.  Karaca 
said the total and real cost of the new incentives to 
the budget would only be clear once Parliament adopts 
the Law.  (The law is currently being reviewed by 
Parliamentary subcommissions.)  In the same press 
conference Minister Babacan announced revision of some 
macro economic targets such as the current account 
deficit, based on the latest economic data releases. 
 The message given was that although the Turkish 
economy has posted a remarkable improvement, some 
challenges remain. 
 
4. (SBU)  Comment:  Implementation of the new program 
will be just as controversial and difficult as its 
negotiation.  While Turkish officials continue to 
reiterate the government's commitment to fiscal 
discipline using every available platform, they don't 
hesitate to surprise the IMF and the markets at the 
same time with heterodox proposals like the incentives 
law expansion, which -- as an IMF official commented 
privately -- is "economic nonsense."  Again, just after 
the IMF mission left town, Finance Minister Unakitan 
hinted at the possibility of a cut in the current 18% 
value added tax rate for textile and ready-to-wear 
products.  In addition, it appears that implementation 
of the tax administration reform will be an ongoing 
issue, as will the complicated and politically 
sensitive social security and banking reforms laws that 
are still subject to parliamentary debate and further 
challenges.   Surprisingly, markets showed little 
sensitivity to the delay in approval of a new program 
until May, despite what some perceive to be a 
deteriorating global emerging markets environment. 
Under an environment of increasing oil prices and 
volatile emerging markets, the GOT will have to pay 
more attention implementing prudent economic policies 
if it is going to continue to be able to finance its 
high current account deficit with foreign inflows. 
Edelman